What’s your credit score?

As of now, there is little that is done to reward good borrowers and penalise delinquent ones. With the inception of credit bureaus, things will change.

It���s been more than two years since the inception of India���s first credit bureau ��� Credit Information Bureau (India) Limited (Cibil). The idea was to reward ���disciplined��� borrowers by offering soft rates and check the defaulters by either denying them a loan or charge a relatively higher interest rate to enforce financial discipline among them. Today, almost every bank has signed up with the credit bureau. But are the benefits trickling down to the common ���good��� borrowers?

What does Cibil mean to you?

Cibil collates data on credit worthiness of all borrowers from banks and prepares customer information reports (CIR) to help credit grantors make faster and more objective lending decisions.

Industry players believe, with a bureau in place, responsible customers can expect faster and more competitive services at better terms and rates from banks and other credit companies. Based on CIR, the credit bureau would assign a credit score to every potential borrower which would bring about the differentiation in rates.

How is your credit score evaluated?

Let us assume that you have asked for a personal loan from X Bank. If you walk into a bank, in which you do not have any past record, the bank posts an online query with the credit bureau. Your application will be evaluated on the basis of your repayment history, other loans and host of other factors like income, age, security and number of dependents in your family. In this case, a good credit record is one of the best indicators of your basic creditworthiness.

A CIR is a snapshot of the borrower���s credit and repayment history. If it reflects a good past payment history of the borrower, it may lead to credit being granted on better terms. If a borrower has defaulted on a bank loan, others can use this information to take a decision on further credit delivery.

This would also make the way for differential pricing. It would help in lowering the cost of a loan. Hence, lenders will be in a position to offer lower price to good borrowers. The bank receives Cibil���s response in the same working day, which helps the former to arrive at a valid credit decision.

How do you ensure a good credit score?
The key is to pay your EMIs on time. A budget plan could help you decide on the repayment of other loans. Use your savings to pay off a part of your debt or save on high interest costs.

What is the criteria to get a good credit score?

The parameters for a good credit score are ��� previous track record of loan repayments, default rate, payment delays and outstanding loans, among others. Punctuality of payment in the past, amount of debt expressed as the ratio of current revolving debt to total credit limit, length of credit history, types of credit used (instalment, revolving, consumer finance), amount of credit obtained recently are some of the parameters used globally.

Do you get a copy of your credit score?

As a customer you do not have access to your credit score directly from the credit bureau. As per Cibil norms, customer information reports (CIRs) can be accessed only by member banks. Further disclosure to any other person is prohibited. However, if the bank has drawn a report on you, then you can obtain a copy of the same from the bank.

How does a DSA keep track of your credit score?

Be it a credit card or a personal loan, banks are just a call away thanks to the advent of direct selling agents (DSAs). Banks outsource the marketing of products to DSAs. Does that mean the DSA has your credit score before selling a loan on phone?

No. DSAs do not decide on the product pricing or interest rate dynamics. Once they identify and tap the customer to sell a product, they pass on the customer details and papers to the concerned bank. The bank carries out the necessary due diligence and arrives at the interest rate and other costs attached to the product.

Are you really benefiting from the differential rate structure now?

As of now, differential interest rate practice has made way into the credit card segment. This implies that a bank charges different interest rates to different customers depending upon their credit worthiness. Here is where a credit bureau comes into play. In India, so far most banks have signed up with Cibil to share information about borrowers.
In fact, Parliament passed the Credit Information Companies (Regulation) Act in 2005, which makes it mandatory for all banks to share all information with them about their borrowers with credit bureaus. All banking companies would electronically report personal details of borrowers, their borrowings, and repayment history and delinquency status to a credit bureau (Cibil in this case) on a monthly basis.

Once this practice takes off, banks could start offering differential interest rates, say industry players. At present, every borrower pays the same rate, be it a home loan or an auto loan, which means that even ���good��� customers get a raw deal and the ���bad��� customers are left unchecked. Once Cibil becomes completely operations, such standardisation of rates will end.