Consider this: You step into a bank's branch to apply for a home loan and the bank not only approves your loan application, but also decides to waive off the processing fee. Or, imagine putting in a request for a personal loan, and getting it sanctioned at a relatively low interest rate.
These hypothetical scenarios could turn into reality, if you boast of a healthy credit score and are prepared to negotiate hard with your bank for favourable loan terms, on the back of this information. Instead of just worrying about how your spending habits — especially the ones financed by credit cards — could affect your credit history, you could, for a change, use it to your advantage.
At least, this is what banks and credit information companies have been promising ever since the advent of Credit Information Bureau (India), or Cibil, the first credit bureau in India. It is a common practice in developed countries, where loan-seekers use good credit score as a bargaining tool to ask for lower rates of interest or other concessions. In India, however, it is still at a nascent stage, with an established structure of offering differential rates of interest not being in place. Also, until now, a borrower did not have access to his or her credit score, although it has always been available to banks for making credit-granting decisions.
Now, Cibil, has started allowing individuals to access their credit scores directly, for a fee of . 450. It will be issued to you along with your credit report, after you submit the application form and relevant identity as well as address proofs asked for. The form can be downloaded from the company's website (www.cibil.com/d2c). The score is a three-digit figure, ranging from 300-900, with 900 indicating a high level of creditworthiness and 300 pointing to the reverse. Until now, individuals could purchase only credit reports from Cibil as well as other credit information companies like Experian and Equifax.
PREFERENTIAL TREATMENT
While credit history is not the only parameter used for determining an individual's loan eligibility, it is increasingly playing a key role in the loan approval process. Its importance has grown exponentially over the years. For the bank, this score — and by extension, the applicant's credit history — indicates the likelihood of the individual defaulting on the loan. Therefore, someone with a good credit score will be seen as a reliable customer, which is a major source of comfort for a lender. In return, you can try to extract some concessions. Sure, the Indian banking space is a long way off from offering lower rates of interest to someone with a healthy credit repayment record, but you can negotiate for certain other allowances. There have been cases where banks have agreed to waive off, say processing charges for those with a healthy credit history. In the case of unsecured loans, banks could be even more accommodating. Credit scores do form part of our internal rating mechanism that determines the loan sanction. For example, for existing credit card customers, we may offer a lower rate of interest on unsecured credit like a personal loan to a customer with a low-risk profile. However, there are no set standards for granting such leeway, and the decision is taken mainly on a case-to-case basis. Also, such instances are not widely publicised, which is why it may help to know your credit score, and ask for favourable terms and conditions using it as a bargaining tool.
At the moment, few banks distinguish between borrowers on these lines when it comes to terms and conditions of loans. The concessions are confined to some leverages in the processing fee or prepayment penalty. Going forward, banks may offer even discounted rates to attract borrowers with good credit scores. If you have a good score, you can approach Bank X and inform the officer that Bank Y has agreed to offer a lower rate of interest. This could force the former to either match or make its offer more lucrative for the customer. This is the future scenario that is being visualised.
SCORING HIGH ON RELIABILITY
So, what is it that you can do at your end, to ensure that your credit history reflects a squeaky clean picture of your borrowing track record? For one, you need to know the factors that influence your credit score. Cibil's scoring model takes into account the amount of credit you may be using, defaults, if any, the number of loan applications made, tenure of existing loans, credit mix, kind of credit facilities availed by you while calculating the credit score. For instance, if your borrowing portfolio is made up more of credit card debt than secured loans, it could drag down your score. Hence, if you wish to score high on this scoring system, you need to ensure that your repayment track record is spotless. This means you need to pay your EMIs (equated monthly instalments) on time and clear any outstanding credit card dues as per the schedule.
You should also maintain a healthy mix of credit and apply for new loans in moderation. It is also advisable to monitor cosigned and joint accounts on a monthly basis. You should also make sure that you pay your utility bills on time, as credit bureaus may soon start incorporating your electricity, phone and other utility bill payment record into your credit history. Thus, being a model borrower and customer would go a long way in presenting an ideal picture to a prospective borrower.
