If you are applying for a loan from a bank, you not only need to have your papers in order but your past history in financial transactions also matter. Before underwriting a loan, banks almost always check a customer’s credit history, which is basically a summary of your past and current financial relationships with banks and financial institutions.
So payment of your EMIs and credit card bills on time is essential to ensure your credit worthiness to a lender. The credit history is compiled by credit information companies (CIC) that gather data on these transactions for individuals who are credit active and not just have a bank account. Apart from member banks, individuals too can apply to these CICs and get their credit score in order to apply for a loan or to understand how to improve upon it for the future.
But significantly, it is not just information on credit card and loan payments, efforts are also on to expand the coverage of datasets that can be used for credit history to include payments for postpaid mobile phones, insurance and utility services.
While CICs are already doing identity authentication by using the data from the Unique Identification Authority of India, they are also in talks with telecom companies as well as the Election Commission to access their database and expand the scope of credit history and authentication.
“The regulatory framework is trying to be expanded. So we are in talks with telcos to get their postpaid data,” said Mohan Jayaraman, managing director Experian Credit Information Company.
If the move goes through, the information on how customers pay their postpaid phone bills would also be used by CICs as part of an individual’s credit history.
“Most of the telecom companies are using data from CIBIL as members but data cannot be shared by them on customers,” said Harshala Chandorkar, senior vice-president, consumer services and communication, CIBIL, adding that the issue is being looked into. Jayaraman said that apart from access to the Permanent Account Number database, Experian is also in talks to get data from the Voter ID database.
At present, there are four CICs in India-the Credit Information Bureau of India Limited (CIBIL) that was the first to start in 2004, Experian Credit Information Company, Equifax Credit Information Services and CRIF High Mark Credit Information Services, all of which are registered with the Reserve Bank of India and backed by the Credit Information Companies (Regulation) Act, 2005 (CICRA). To partially overcome the problem of incomplete and inaccurate credit information, the Reserve Bank of India in January this year has already mandated all credit institutions to become members of all CICs as against the earlier norm that every credit institution would be a member of one CIC.
“When a specified user, as defined in CICRA and Credit Information Companies Regulations, 2006, obtains credit information on a particular borrower or client from a CIC, it gets only such information that has been provided to the CIC by its members. This does not include credit history related to those non-member Credit Institutions with which the borrower or client has or had a current or a past exposure,” it noted.
The move stems from a committee set up by the RBI to recommend data format for furnishing of credit information to CICs. The committee led by HDFC Bank managing director Aditya Puri had noted that India is ranked 28 on the “Getting Credit” page of the World Bank. Pointing out that there is low coverage by credit bureaus — covering just 19.8 per cent of adult population (as of June 2013), as against 100 per cent in various countries, the report had noted it is partly due to lower penetration of financial services in the country and had called for improving the coverage of credit information business in the country.
Accordingly, its far reaching recommendations also suggested that credit information should also cover defaults in commercial paper and such products.
How your Credit Score Works:
Understanding how your credit score works is even more important now, given that the government is looking to incentivise electronic payments and use of credit and debit cards to cut down on the dependence of cash currency. Now every CIC in the country is on a level playing field and has data from all credit institutions. This data is used to create financial histories of consumers including a credit score. For instance, CIBIL has a credit score ranging between 300 and 900 and higher the score, better are your chances of securing a loan.
The credit history and score can be tapped into by member banks. Individuals too can access their credit reports by logging on to the website of these firms and ordering their report that comes at a nominal fee. In case of any errors in their reports, individuals can write to the credit information companies to get it corrected.
CIBIL has a database of over 400 million accounts and has 1300 credit institutions as members. Similarly, Experian has data on about 300 million transactions.
How to improve your Credit Score:
Start out young: Experts note that most credit mistakes take place when we are young — at the time of our first job or in college. So it is essential to keep track of all your payments and not postpone these.
Be Punctual: Always pay your loan EMIs and outstanding credit card bills on time. In case of late payment, try to be as prompt as possible.
Be Proactive: Rather than discovering that your credit history is poor at the time of applying for a loan, apply for your credit score on your own to understand and improve it.
Be prompt: Close any accounts that you no longer use. In case you find an error in your credit information report, do write to the CIC promptly.
Be practical: According to CIBIL, it is prudent not to use too much credit as high utilisation of credit over a long period of time indicates to a high repayment burden and could eventually impact your score.