Credit score: A good credit history for a secured future

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SummaryPep up your credit history because banks and non-banking financial institutions read it before they decide on your loan application or a credit card upgradation

banks have become increasingly wary following the 2008 global financial crisis that had its origins in bad housing loans. Further, the tight liquidity conditions in the country over the past one year have made banks more cautious and choosy in giving out loans.

Every credit information company has its own method of calculating credit risk and hence would give a different score. For instance, CIBIL provides credit scores ranging between 300 and 900 to individual consumers by compiling details of bank accounts, loans, credit cards. It considers a score of 700 as essential for getting a loan, but warns that factors such as how recently and frequently a customer has defaulted on a loan payment also plays a role in a credit score.

The score is used as a gauge by lenders to assess an applicant’s risk profile while processing a loan or credit card application. It has also started to provide a risk index between one (high risk) and five (low risk) for individuals with less than six months of credit history.

Apart from the credit report, banks also use other criteria such as employment, income, age and residential address of a potential borrower before approving a loan application. Thakral says that earlier it was largely private sector and foreign banks that reviewed credit history before deciding on loan applications but now even public sector banks have begun to make such enquiries. In fact, the country’s largest lenders — State Bank of India — now also regularly seeks credit information from CIBIL.

How it works

Typically, credit information firms have a network of member banks and financial institutions, that send transaction details to it regularly — in some cases credit card companies send it on a cycle basis, while banks prefer to send the data on a monthly basis.

Credit information companies then use the data to create financial histories of consumers, which 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 ranging from Rs 148 to Rs 470.

In case of any errors in their reports, individuals can write to the credit information companies to get it rectified. Under law, banks are given a 30-day timeframe to correct their records. But the main objective behind allowing individual consumers to tap into their

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