Think Twice Before Applying For Credit Indiscriminately!

“My friend Arun who is a top official in a large brokerage firm was incensed with his prospective,home loan,lender. He had approached them on the advise of his colleague to whom the lender had given an excellent rate. Whilst the lender was more than happy to give him the,loan
they were offering him a slightly higher rate. When he enquired about the reason for the higher rate, he was informally told that his credit score was lower than his colleagues and hence the higher rate.

He had asked for and got a copy of his credit report from the prospective lender and confirmed for himself that the credit report was in order and had correctly showed that he had paid all his dues on time. He had also requested his colleague to get the credit report from the same lender. When he compared the two credit reports he was amazed that his credit score was lower than his colleagues credit score. (See box for what is credit score and how it is computed). Hence he called me to throw some light on the matter.,What is a credit score?

Credit score is a number between 300-900 derived by the credit Bureau as pre its own undisclosed formula that predicts the likelihood of applicants or customers defaulting on a loan over the next 12 months. Higher the score the lower is the chance of the customer defaulting over the next 12 months. A score of over 700 is considered good and any score over 750 is excellent. A score of 600 or below will mean in most cases that the lender will look long and hard at your loan application before sanctioning it (if at all). The methodology for calculating the credit score is proprietary to the credit bureau and only broad principles on how the score is determined are available. As a general rule if you pay all your debts on time you should get a decent credit score.,I asked him to take his colleague’s permission (in writing, of course) and then send over the two credit reports to me. The look at two credit reports was quite illuminating. Arun and his colleague both had excellent credit repayment records and good credit scores though his colleague’s credit score was little higher than Arun’s. The only visible difference that I could see was that Arun had about four,credit cards,(all of which showed an impeccable repayment record on the credit report) against only two credit cards for his colleague.

However a closer look at the report revealed that there had been four enquiries for his credit report for a,personal loan,of Rs 3,00,000/- just four months back, though no personal loan showed up on his credit report.

When I checked with Arun about this, I was told that he was considering taking a personal loan for a foreign holiday a little while ago but had ultimately dropped the idea. He had applied to these four banks for a personal loan but had ultimately not taken the personal loan though it was sanctioned. The banks, once they received the request from him for a personal loan, had sent a request to CIBIL for his credit report. The CIBIL credit report also contains information about how many times CIBIL has got a request for the credit score of a particular person and for what products and amounts. Now it is not known how CIBIL exactly determines your credit score (see box) but a number of these requests within a very short span of time especially for unsecured credit (indicating hunger for credit) can have a negative impact on the credit score.

So at least for now I asked Arun to live with it (after all his credit score was not bad). But for the future I told him to be careful while shopping for credit. First make up your mind if you need credit or not before applying for it. Sometimes the sheer fact that you applied for credit (that you did not ultimately need) may result in a small reduction in your credit score even though you did not end up taking the loan. The best way to go for such kind of credit product shopping is that before applying for any loan or a,credit card,; first get your credit report from CIBIL directly (unfortunately you will not get the credit score on this report which is given only to banks). You can do so by visiting the official website of CIBIL and downloading an application form from there.

Along with this form one needs to send across a copy of his or her PAN card and a copy of his or her address proof. All these documents and a payment of Rs. 142 either through demand draft or via online payment has to be give to CIBIL. On receipt of all this, CIBIL will send across your own credit report to you. Once you get your credit report, you should check the accuracy of your credit report especially for any loan or credit card that is never held by you. These kind of errors are to be reported immediately to CIBIL and the concerned banks simultaneously. The banks should be asked to get the records amended in CIBIL records. If they do not respond to your request within a month, you should file a complaint with the banking ombudsman. A mistake in your credit record can prove very expensive, hence pursue these steps seriously.

You should apply for a loan or credit card only and only if you see no error in the credit report provided to you by CIBIL.

Once you get your credit report and it is error free, then you should go ahead shopping for credit card or a loan product, but before applying for many of them to know more about the scheme aligned with them, you should always do some smart shopping online over the Internet. There are various price comparison websites like Apnapaisa that allows you to compare details about various credit products across various parameters. You can do some smart shopping by comparing various credit products and then apply only for the product that suits your requirement the best. This will ensure that only one bank makes an enquiry for you credit record, hence your high credit score can be safeguarded.

 

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