How CIBIL keeps an eye on you from your very first credit card

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New Delhi | Published: January 20, 2016 12:42 PM

CIBIL rating is based on the principal that your past treatment of debt is an indicator of how you are likely to behave in the future.

credit cardCIBIL rating is based on the principal that your past treatment of debt is an indicator of how you are likely to behave in the future.

Digitization has happened for almost all aspects of financial and banking industry transactions and now it is difficult to keep anything under wraps. Be it cash transactions, tax issues or your credit history all can be traced and tracked.

With digitization nothing can be forgotten. You can forget an old credit card but your CIBIL report does not; banks and credit card agencies share all data related to delayed and missed payment with credit rating agencies.

So, do remember that your financial digital footprint will follow you. Here is how the system that pertains to your credit card spending work.

How Credit Rating Works?

Till about fifteen years back, banks lent to customers or issued cards based on their own policies and perceptions. There was no agency or mechanism that allowed banks to objectively assess the risk potential of a customer. With setting up of CIBIL and other credit agencies this changed though slowly; however now it is an accepted norm to lend after assessing the credit score of an individual.
Credit score is calculated after collecting data from all lending agencies and analyzing it. The factors that go into making the CIBIL score of an individual are; the payment history, credit utilization, credit score inquiries, credit mix and how deep is the credit history.

CIBIL Score is all about History

Preeti was surprised when her auto loan was rejected due to a poor credit score. Since this was her first loan application she was in a fix about how could she have defaulted? On checking her detailed credit report she was dismayed to find that the cause of her troubles was a credit card she had owned in her student days. She changed her address; she had neither surrendered the card nor applied for change of address. She had completely forgotten about this card and its existence.

CIBIL rating is based on the principal that your past treatment of debt is an indicator of how you are likely to behave in the future. While often there might be genuine issues that have led to a default or delay, there is no way these subjective factors are reflected in the CIBIL score. A credit history of at least 6 months or more is required for a CIBIL score.

Though each single lapse whether it’s missed payments or high credit ratio or foreclosing a loan contribute to the final CIBIL score it is important to remember that a lot of parameters over a long period of time are considered. If by and large one is careful with his/her debt one or more lapses will just be a blip and will not cause any major negative impact on the CIBIL score. Since a credit score is calculated using a combination of various factors, just being prudent about one aspect and ignoring others can also have a negative bearing on the CIBIL score.

Harsha had always been careful about paying his credit card bills on time. So when his personal loan was denied due to a low CIBIL score he went through his CIBIL report in detail. His credit utilization had been high especially in the early days of his career. Though he always paid on time but his credit card bill was an average of 35000-40000 for a sanctioned limit of 60000.

Credit utilization is a ratio that measures the credit card usage vis-à-vis the sanctioned limit. It is calculated per card and overall also in case of more than one card. Not only should it be low overall but for each card also it should be low. Despite you always paying time high credit utilization reflects credit hungry behavior.

When it concerns a credit card remember paying on time, keeping a low credit utilization ratio and surrendering cards that are not required or used are the basic requirements if one wants a healthy credit score. Also do keep in mind small regular transactions with timely payments are the simplest way to get a credit trail and a good CIBIL score.

Being careful with credit card usage right from day one is important. In our early years of financial independence we might go overboard due to lack of knowledge, newly found financial freedom, peer pressure or simply because we are careless. These small avoidable mistakes continue to follow you for a long time and can dampen your chances of getting future credit. You may forget about your mistakes but CIBIL keeps an eye and maintains a record of each and every transaction right from your first credit card!

By CreditVidya

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