Wednesday, 27 January 2016

Can a Bounce Cheque Impact My CIBIL Score?

A bounced cheque spell trouble as it not only means levying of charges by the bank where the account is held but could lead to legal action also. Ideally the issuer of the cheque must ensure that his account is funded, there is no mismatch or any other discrepancy in the cheque or the account which can cause the cheque to be dishonored. However there might be times when due to some reason or another, a cheque may bounce; so what are the after effects of a cheque bounce. As stated above the bank imposes a fine which may range from Rs. 200 to 500; depending on who the payee is, a penalty may be imposed by them too and of course there is an impending threat of legal action. But does a bounced cheque impact the credit score in any way? Yes and No…….
Does a Bounced Cheque Impact the CIBIL Score?
Let us look at an example to understand the impact of a bounced cheque on the individual’s credit score.
Arun issues two cheques, one for his monthly rent and the other one for credit card payment. Both cheques bounce. While the one which is for the rent will attract only cheque returns charges, the one which is for credit card payment will result in cheque returns charges being imposed by the bank and the credit card company both along with the late fee penalty by the card issuer. The rent cheque bouncing will not be reported to the credit rating agency; hence it has no impact on the CIBIL score. Any credit card payment cheque being dishonored will be reported to CIBIL and hence it will lower the CIBIL rating.
Depending on who the payee is; a bounced cheque may or may not impact the credit score as the case may be.
Contrary to popular understanding, when a cheque is issued for payments that are not related to any form of debt, a bounced cheque results only in levying of penalty and a possible legal action but there is no impact on the credit score. Since credit rating agencies collect data and information related to credit cards and loans, banks do not report all bounced cheques to them.
Obviously when a cheque issued for payment for a loan EMI or a credit card payment is returned the banks are responsible for reporting it to the concerned credit rating agencies because they relate to debt payments. A bounced cheque means delayed or missed payment which impacts the CIBIL score. Do remember that even when an auto debit mandate falls through due to insufficient funds (or some other reason like an account freeze etc), though it’s not a bounced cheque technically, it will be reported to the credit agencies which causes the credit score to fall.
A debt repayment cheque being dishonored also results in imposition of high penalties and fines.  These fines and late payment charges are generally mentioned in credit card application form or the loan agreement documents. Apart from the impact on credit score they result in financial setback too.
Another factor to bear in mind is that even a single bounced cheque (for debt repayments) can have an immense negative impact on the CIBIL score. It will reflect on your credit report for years and can dampen the chances of getting fresh loans.
In case one is running short of funds explore the option of paying the minimum amount due for the credit card. Though this option has its own pitfalls but will save you from a negative hit on the credit score and imposition of high charges. For loan EMIs you could directly contact the banks and can request them to delay the cheque debit for a few days if possible; the bank is not liable to this but if you have been responsible borrower in the past they might agree to consider your request.
If a cheque has bounced due to the bank’s fault and it still shows in your credit report you can contact the credit rating agency; there is a mechanism laid out to solve a CIBIL dispute which can help you in getting such an error removed from your CIBIL Report.