Know your Credit Score - Your Cost of funds may depend on it.

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My client complained that he was being offered a ridiculously high rate of interest on his car loan. It was surprising because he was a 'Privileged' customer of his bank and had no other liabilities. On enquiry, he was told that he was offered a higher rate due to bad CIBIL score. What is a CIBIL score and how did it impact my client's rate of interest on his car loan?

CIBIL stands for Credit Information Bureau (India) Ltd. It collects information about borrowers like my client from all Banks and lending Institutions operating in India, collates such data and creates, maintains and distributes a report on credit history of commercial and consumer borrowers like credit card users, home loan or personal loan borrowers.

Their report called Credit Information Report (CIR) is a factual record of a borrower's credit payment history compiled from information received from different credit grantors. Its purpose is to help credit grantors make informed lending decisions - quickly and objectively. For Example when a banker needs to evaluate a borrower's capacity to repay, the payment history of such borrower spread over different loans with different institutions can give it a good picture of fiscal discipline and ability of the borrower to repay. It can thus avoid repeated defaulters and pursue quality clients for its loans portfolio.

CIBIL also offers a credit score in the range of 300 -900. The higher the score, the better are your chances of getting a loan from a bank. Having unsecured loans, such as a personal loan, and poor credit card usage, or defaults in EMI payments, or a bad payment history could lead to a poor score. For example: If you had to settle a credit bill at 50 % of dues, the matter although settled will reflect in your credit history and prevent other banks from issuing a credit card or unsecured loans to you. You can see how this report has now become one of the most important criteria by lenders while providing loans or any credit facility.

Any borrower including a user of credit card will have his credit history included in the database of CIBIL. This data can be shared by all member clients of CIBIL. Here are few of the reasons why you must know your CIBIL score:
  • Bargain for better rates -If you have a good credit score, you can bargain for a lower interest rate on practically all loans.
  • Find out discrepancies - Sometime old issues that have been settled with the banker may still appears in your credit history, if your lender has by error or otherwise failed to update  settlement of these issues in your record. For example in my clients case, his old dispute with a bank related to their credit card and a personal loan, which was pretty much settled, was still showing as an outstanding in his CIBIL report. The amount involved was large enough to get his score down. CIBIL has a dispute redressal system for such errors. On lodging a complaint with them, CIBIL follows up with the bank for data validation, and the bank needs to reply in 30 days after which the new record is updated.
  • Gauge your loan worthiness - How a lender looks at your credit worthiness is very much dependant on your CIR and Credit Score. A low number could mean difficulty in getting credit at reasonable costs despite eligibility
  • Checking for Fraud - It is shocking but true that identity theft is a reality in the credit business. It is not unlikely that your credit report may have details of loans that have never been taken by you. Checking your CIR will help you detect and report such frauds early in time.
  • Measure improvements in credit score - By paying EMIs regularly, repaying personal loans, avoiding outstanding credit card payments and reducing the number of cards in your name you can improve your credit score. Tracking your score regularly will help measure the improvement in your score.
You can ask for your CIR by following instructions in the link given below http://www.cibil.com/web/credit-score.html

Remember that it is not only lenders that are sharing your credit info. CIBIL is also partnering with telecom, mutual funds and insurance companies to share your credit history. Your CIR can affect the quality of services and products from these entities as well.

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