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Are you planning to apply for a new telephone connection or probably a subscription for a magazine or even simply applying for a loan… If you look closely, all these situations have one thing in common – your commitment to pay the service provider / financial institution on a monthly / regular basis. But the service provider does not know you in person. In such a case how can they rely upon you or your financial commitment ?  There are growing number of defaults in India whereby a person just drops their commitment and fails (whether purposefully or otherwise) to pay for their monthly bill / EMI amount with possibly no ramifications. However, these defaulters may not be aware they are being closely watched by the Credit Watchdog – CIBIL.

 

Credit History

Have you heard about the term ‘Credit History’. It is avery commonly known term in the developed economies and is now gaining steam rapidly in India. We all have some form of relationship with financial institutions. A couple of examples can be a bank account, credit card, home loan, personal loan and other loan facilities. In developed economies, this relationship gets extended to almost all form of utility providers who bill their customer on a monthly basis as they rely upon the person to pay back the billed amount on the due date and in this capacity such utility providers act as mini financial institutions.

Let me take an example to explain what credit history is and how it works. A person John took a loan from Bank A and subsequently defaulted upon his repayment. John plans to go to Bank B and repeat the same act of taking a loan and defaulting again. He thinks that Bank A doesn’t know Bank B and hence he can take advantage of this situation to defraud Bank B. John’s plan may work if Bank B is not aware of the default which John did with Bank A and may end up extending a credit facility to him. How can Bank B prevent itself from being exposed to John’s financial situation / habit of not meeting his financial commitment ? The only way this can happen if Bank A informed Bank B that John is a defaulter. Bank B may then reject John’s application to prevent any credit losses. You may spot that this is possibly only if all Banks & financial institutions share information between themselves. But how would this happen ? There are over 80 banks in India and Bank A can not practically send letters to all banks in India ? To solve his practical problem of sharing credit information a centralised agency was formed. This agency is called CIBIL or Credit Information Bureau (India) Limited.

 

Sharing of Information

In the above paragraph you may have realised that if financial institutions don’t share information, they would not be able to prevent credit frauds or extending credit facilities to people who are not credit worthy. To empower the Banks with the Power of Communication, all banks & financial institutions share specific financial informations of their customers with CIBIL. This information is generally associated with types of banking facilities held by customers, length of facility, defaults in the past on the account, etc.

 

How is Centralised Information Used ?

CIBIL maintains a centralised database of over 170 million customer records. In our example, Bank A would have mentioned to CIBIL that John holds an account with Bank A and that John has paid defaulted on his loan repayments. Similarly, if John held an account with Bank C, the record of the same would also be held by CIBIL. If Bank B now wants to extend a credit facility or issue a new credit to John, it would contact CIBIL to get the credit report of John. The credit report would mention that John holds an account with Bank A & C and that John has not repaid his loan taken from Bank A. You may now realise that Bank B can make an informed decision and may possibly reject John’s loan application based upon his poor credit history.

 

I Have Never Defaulted On my Payments !

I must congratulate you for making up on all of your financial commitments. You may however be thinking that if you have never defaulted upon your financial payments then this article may not be relevant for you. On the contrary, it is vital that you also know that each of your regular & timely payments also gets registered in CIBIL’s database. When you would approach any bank for a loan and the respective bank pulls your credit details from CIBIL, your good history of repaying your credit payments is also reflected to that bank via your CIBIL credit report. This good credit history forms one of the most important criteria used by banks to sanction a loan.

 

How To Improve Your Credit History ?

Your credit history plays a vital role in your financial well being. Your dream of buying a home may always remain a dream if you can not get a home loan. A bank may find it hard to approve your home loan if they find either find No Credit history or a poor credit history about you from CIBIL. If you have a poor credit history then it doesn’t mean that you are stuck with it for life. There is always an opportunity to create or improve your credit history. But it is important to know that there is no quick fix and you may use the follow the tips to create of mend your poor credit history :

  1. Open a bank account if you don’t have one. Try maintaining the same bank account for a number of years to create your banking relationship with your bank. Generally a bank may ignore a poor / no Credit report if they have a long banking relationship with a customer.
  2. Apply for a credit card. Your existing bank may be happy to approve your credit card application seeing your banking history.
  3. Use your credit card for your regular expenses. Make sure that you DO NOT miss upon the due date for paying your Credit card payments. If you miss upon a single repayment, you may damage your credit history.
  4. Avoid applying for multiple loan / credit card applications if your first application is rejected. Every application which you make with a bank gets registered with CIBIL. The more such requests are registered, the more it reflects that you are hungry for credit. This makes you a risky person for lenders and lowers down your chances to get your future loans approved.
  5. Wait for a couple of months / years and keep on using your credit card and paying your dues regularly.
  6. After a year or so, apply for another credit card and if it gets successful, start using the second credit card  along with your first credit card in line with the points mentioned above.

As a result of point 1 to 6, you may notice that after a year or so, your credit history would start getting created or repaired in CIBIL’s database. But how would you know what credit history CIBIL is storing for you ?

 

How do I know About my Credit History ?

CIBIL has now introduced a facility to allow the customers to look at their credit file which is maintained by it. It is a very good idea to have a look at your credit history atleast once in 2-3 years, specially if you intend to take a loan in future. By looking at your credit details stored with CIBIL, you can identify if there are any credit related issues which you can come to know and can then take proactive steps to rectify them. You can follow the following steps to extract your Credit File from CIBIL :

  1. Visit www.cibil.com
  2. Fill an online Credit report & Credit Score request form;
  3. Make a payment of Rs. 450 online via Netbanking, Credit or Debit card.
  4. Once the payment has been successful, you would be provided a CIBIL registration ID;
  5. You shall be authenticated online to check for your ID & Address.
  6. In case your online authentication fails, you need not worry. Take a print out of your payment receipt and send self attested photocopy of your ID & Address proof (as entered in the online form) to CIBIL’s address. Within 10 days you should get your CIBIL credit report and credit score via email.
 
 
Credit Score
Your credit report contains a credit score which is basically a number ranging from 300 to 900, whereby 300 means a Very Poor Credit history and 900 would mean an Exceptional Credit history. All banks have their unique credit analysis models and use such credit scores as inputs while deciding upon a loan application. Your aim should be to have a score between 700-900 in order to fare reasonably well in your loan applications. These scores keep on changing depending upon how well you have been doing with your credit repayments and your loans. If you end up defaulting in your home loan EMI, be prepared for this score to inch closer to 300 jeopardising your future opportunities to take loans.
 
 

Future of Credit History

The application of Credit History in India has still a long way to go. If we can take heed from developed economies, in coming future even applying for a cellphone connection would require a credit check with CIBIL. If you default upon your monthly cell phone bill, the respective cell phone service provider may register this default with CIBIL. Utility companies would have a lot of power to force their customers to make the payment of their monthly bills. If your credit history is poor, you may struggle to even get access to basic utility services like gas, electricity or telephone. With a poor credit history, you may have to pay upfront charges for your usage and may also attract higher costs. It may hence become the basis of all transactions within the economy and a person may be more afraid to get a hit on his credit history than a point on his driving license. Seeing the vast scope in this direction, a major western player of Credit Reports – ‘EQUIFAX’ has started its operations in India.

 

Hence, now is the right time to have a look at your credit report and make sure that it is growing towards a healthy score as you never know how your credit scores may affect your future financial well being – after all the future shall be era of Credit & Credibility !

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10 Responses to Improve your Credit History – Timeline of Your Current & Future Financial Image !

  1. Vivek K says:

    A very well written article to make people aware of CIBIL. The general public needs to be aware that they are being watched and they need to take repayment of their loans seriously. They need to be disciplined otherwise it could hurt them in long run.

    Would it be possible for you to upload a sample report? Also, how points are added and how they are subtracted? May be a close review of a sample report would be more beneficial for the readers.

  2. Banyan Financial Advisors says:

    Hi Vivek,
    Thanks for your comment. Unfortunately I haven’t got a sample report available as it contains confidential data of the respective person. However, the moment I shall get my hand over it, I shall upload it.

    Regards
    BFA

  3. […] Improve your Credit History – Timeline of Your Current & Future Financial Image ! […]

  4. […] ratings such as CIBIL in India. For more details individual credit ratings, you may want to refer Improve your Credit History – Timeline of Your Current & Future Financial Image). This article tends to focus more on the corporate & country rating […]

  5. Kamlesh says:

    HEllo, I just came to know about my CBIL report. I have not done the payments on time in the past. Now today I am on good level, but due to my hystory in present I am unable to get homeloan. I do not have the detail report, but I will get the same. I would like to have an advise from you, even if I pay if any outstanding is there on my name, the CBIL will take it off my name ?

  6. Hi Kamlesh,
    I do appreciate your situation. Unfortunately the way CIBIL works – they won’t take your name off the records for several years (7 years). I would encourage you to settle your outstanding at the earliest. However, one this is sure that your credit history shall mention about the non payment for next 7 years.

  7. Sivagurunathan says:

    If I am Paying Rs 450, then how many times i will get my score… Either one time. or Multiple times.

  8. Hi Siva
    I believe the fees is for accessing your score one time only.

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