Good credit score can get you loans faster, cheaper

Ravi Gupta has been a happy-go-lucky guy who believed in living life to the hilt. Saturday night parties, pub jaunts, buying the latest gadgets and half-a-dozen credit cards to meet his expenses, life has never been more fun for this business process outsourcing (BPO) employee. As with everyone else, the day of reckoning dawned on him too. Gupta wanted to get a personal loan to clear up the pile of debt on his credit cards and to his shock, he realised that none of the banks were willing to lend him money. The reason, a bad credit record.

But how do banks, from which he has taken no loan earlier, know that Gupta had a poor repayment record. There are big brothers in the form of credit bureaus that keep a tab on the credit behaviour of people.

What does a credit bureau do? It receives and shares information on the borrowing and repaying behavior of people with all lending institutions like banks, non-banking finance companies (NBFCs), housing finance companies and credit card companies.

In India, Cibil is the only official credit bureau now and it has credit records of people in India from the year 2000, when it started operations.

What information can one get from a credit bureau? A credit bureau provides credit information and also a credit score to estimate one’s creditworthiness. Cibil’s credit score, for instance, would range between 300 and 900. A lower score in the 400-500 range, indicates that it is risky to lend to the individual, while a high score in the 800-850 range, means that the borrower is likely to repay the loans on time.

What are the benefits of a good credit score? A good credit score is also a bargaining tool for the individual to get loans faster at better rates. "I got a 0.50 per cent discount on my car loan interest rate because of my good credit score. Banks would not mind lending to individuals at a lower interest rate as the risk in lending to the person is also low," said K Ramalingam of Holistic Investment Planners.

While nationalised banks may give about 0.50 per cent discount, multinational banks may even give a 1 per cent discount on loans to people with good credit scores, according to Ramalingam.

Who can check the credit information/scores of consumers? Anyone who has taken any form of credit in his life, either a home loan, auto loan or even a credit card, will have his information recorded in the Cibil database. By providing documents like an identity proof, address proof and payment of a small sum (Rs 142 for credit information record and Rs 450 for credit score and credit information record) to Cibil, one can get the details.

The credit score and information of a person will be available only to the individual, his present lenders and future lenders, if he has applied for a loan and nobody else.

What are the factors that affect one’s credit score? The loan repayment history of a person carries the highest weightage on his credit score. "Other factors that matter, include the number of credit cards and personal loans that the person has taken. The number of loans that has one applied for, will also matter because it shows the credit-hungry behaviour of the individual and it will be viewed with caution by the lender," said Arun Thukral, managing director, Cibil.