Understanding CIBIL report and keeping the score high with safe and smart saving
It has been around 12 years since Credit Information Bureau (India) Ltd (CIBIL), the country’s first credit bureau started its operations. However, there still are several myths, and apprehensions among people about functioning and the role played by credit bureaus like CIBIL as well the credit score. To demystify such myths and explain easy ways to improve the credit bureaus for becoming responsible borrowers, CIBIL along with Moneylife Foundation and Softcell Technologies held a seminar in Mumbai.
The speakers included Harshala Chandorkar, Chief Operating Officer (COO) of CIBIL, Sucheta Dalal, Managing Editor of Moneylife magazine and Debashis Basu, Editor & Publisher.
The first session began with Ms Dalal speaking on the mistakes that affect your financial life and how to keep money safe from financial mistakes, Ponzi schemes, email fraud etc. Many have lost huge amounts of money in pyramid, Ponzi, multi-level marketing (MLM), chain marketing and chit funds such as Herbalife, Amway, Saradha, Rose Valley, SpeakAsia, Gold Quest or QNet. Many are oblivious of how costs and compounding interest can impact borrowings or investment. Several people want to have a credit card and do not even read the terms and conditions, especially the interest rates and charges that are usually in the range of 40% to 65%. Looking at the increased use of credit reports, credit history of borrowers and credit scores by lenders, Ms Dalal said one needs to be really careful in financial dealings, especially while availing and repaying any loan or credit card. This is because, not paying EMIs or credit card dues on time and, in full, can make the person a defaulter in the credit bureau records and disallow him any kind of credit for seven long years, she added.
Lured by high returns, many invest in corporate fixed deposits. Similarly, many opt for fixed deposits of co-operative banks, which pay a higher interest as compared to nationalised banks. Unfortunately, unaware of the risk involved, many have ended up losing their money in such fixed deposits. Mr Basu in his session explained that to save and invest smartly, one needs just a few products. Based on one’s financial goals, investment horizon and tax bracket, they should invest in a mix of equity and fixed income products. Not to forget, make the power of compounding work to your benefit. So, be safe as much as possible, as early as possible, in the right products, he said.
Ms Chandorkar, the COO of CIBIL provided some facts about the credit bureau. She said, founded in 2001, CIBIL has a membership base of over 2,000 comprising credit institutions like banks, financial institutions, non-banking finance companies (NBFCs) and credit card companies. "CIBIL operates in two segments, consumer bureau and commercial bureau. The consumer bureau hold credit information of about 500 million individuals, while commercial bureau has information of businesses and hold about 22 million records," she said.
Ms Chandorkar then explained in details, various sections from a CIBIL credit report and how to read and understand it. A CIBIL report contains information in sections, like personal information, accounts (held by the entity), and enquiries performed (for obtaining credit)... "However," she said, "A CIBIL credit information report does not show information like savings account, transactions details on your cards, investments like mutual funds, stocks or insurance and utility payment details."
The COO, who is a member of the pioneering team that established credit information infrastructure in India, then informed the audience about the credit score methodology used by CIBIL. She said that if the CIBIL credit score ranges between 300 and 900, it indicates probability of default. "While high score indicated that the individual is very likely to pay all loans on time, low score means there are more chances of defaults," she said.
Explaining the parameters used in a CIBIL credit score, Ms Chandorkar said, "There are four basic components with difference weightage in a CIBIL credit score. Past performance has a weightage of 30%, while, credit type and duration as well as leverage has a weightage of 25% each. Rest 20% weightage is based on other factors."
According to the COO of CIBIL, 79% of the loans approved are for individuals with a CIBIL TransUnion score that is greater than 750. Anyone can purchase his/her CIBIL TransUnion score either one time (Rs550 per report) or regular subscription. CIBIL offers two subscription, bi-annual, where the individual can obtain two score reports in a year for Rs800 and quarterly subscription that provides four score reports at Rs1,200 during the 12 months period.
Ms Chandorkar then demystified some common myths about the credit bureau, like CIBIL is a defaulters list, CIBIL rejects loan application, CIBIL blacklists an individual and CIBIL should make changes on its own in the database. She said, none of the statements are true. CIBIL is not a defaulters' list, neither does it reject loan applications nor does it blacklist anyone. "Credit applications are accepted or rejected by lenders and not by CIBIL and since it is only a repository, it cannot make any changes in the database. It is the lenders who can make changes in their records that are submitted to credit bureaus," she added.
Several borrowers, especially defaulters are under the impression that once their 'account' is deleted from CIBIL, they can obtain fresh loan or credit cards. Ms Chandorkar said, "Accounts cannot be deleted from the CIBIL report. If you have closed the account it can be updated as closed account by the bank. If there are any inaccuracies in the credit report, the consumer can raise a dispute and can then get those corrected."
There are many credit 'repairing' firms that promise to remove for a fees the 'settled' remark from a CIBIL report. 'Settled' is a status reported on the loan account when the customer has partly paid the dues on the loan or credit card.
"However," the COO of CIBIL said, "this status cannot be changed unless the customer pays back all the dues and the loan or credit card is closed. Once the dues are paid in full the lending institution then report the status on this loan to CIBIL as 'Closed'. Also understand, CIBIL can only make changes to your report, once the lending institutions submit the updated or corrected data.
Ms Chandorkar then explained the process to correct inaccuracies in a CIBIL credit report. She said it can be done online by visiting CIBIL's dispute resolution page http://www.cibil.com/consumer-dispute-resolution
. Here the person has to provide, name, address, date of birth, report control number (CN-mentioned on the CIBIL report) and the nature of dispute. "CIBIL’s Dispute Resolution Department then analyses and route the dispute to the lending institutions," she added.
Many people, who found that they have a low CIBIL score want to improve it overnight and often easily get lured to credit repairing agents. Ms Chandorkar says, "Your credit report and score is a reputational collateral. Cultivate financial discipline in order to enjoy all the benefits associated with it."
She then shared the six mantras to improve CIBIL score. Here are the six mantras...
1. Pay your loans, credit card bills or any other loans you may have availed in time
2. Do not over leverage yourself on credit- Apply for credit only when you really need it!
3. Maintain a healthy mix of credit
4. Monitor your co-signed, joint accounts monthly.
5. Monitor the loan accounts for which you have stood as a ‘guarantor’
6. Review your credit score and history frequently
The session was followed by a lively, interactive session, where all the three speakers provided answers to several questions raised by attendees.