Wednesday, 16 November 2016

Factors in your Credit Report that could be Surprising!

Q Will getting married have any impact on your credit rating and will it feature in your credit report?
A. No it will not as marital status has no impact on the credit worthiness of an individual.
Q. If you guarantee a loan, will it reflect in your credit report?
A. Yes it would reflect in the CIR, just like your own loans.
Q. Prepaying a loan is a good thing right?
A. No really, at least in the short run for your credit rating.

Credit rating is still a concept that is not understood very well in India and people have a lot of myths and wrong notions associated with the rating process and also about the CIR. Here we talk about factors that may appear as a surprise to you when they appear in your CIBIL report.

A Loan that you Guaranteed:
Guaranteeing a loan means that you undertake the responsibility to pay the dues if the person who originally took the loan is unable to do so. Usually the guarantor is not asked to pay up immediately, the borrower is given a few reminders and if that does not work, then only the guarantor is asked to step in. Thus it makes sense to guarantee a loan only if you are sure that you can pay for it if the need arises. However one must know that any default by the borrower or a delay by him or her will directly impact the guarantor’s credit score just like any other loan the guarantor would have taken. So you might see a default on your report which you think is not yours but it may be loan that you guaranteed which is as bad as a default by you. The guaranteed loans also reduce your borrowing capacity.

Accounts that You May Have Forgotten About:
There might be loan or some credit card dues that you might have forgotten about but your CIR will surely not forget them so easily. So seeing an account that you thought you had paid off completely or might have simply forgotten about might come as a shock to you. This may happen due to multiple reasons. Often when people move they might forget to update all concerned parties about the change in address. The lender or the credit card company may continue to send you information on the old address which does not reach you due to a changed address. This can happen if the email id has not been updated in the records or is no longer in use. So if you have a credit card that you do not use anymore or you thought you had surrendered it without checking about any unpaid dues, the dues may continue to pile up due to the accumulated interest. This bad credit can harm your rating. It may also happen that you have paid a loan completely but have forgotten to take a NOC for the same and this loan may continue to reflect in the CIR as an open loan.

Poor Credit Mix:
A good credit mix is a must for anyone to have a good rating. So if you have only unsecured personal loans and revolving credit (due to credit card usage) then your credit mix is skewed in one direction. Having a combination of secured loans like auto loan or home loan and unsecured loans like education loan, personal loan and revolving card is good for the rating. A combination of both kind of credit gives confidence to the lender that the borrower can handle both types of loan. High incidence of unsecured loans lowers the creditworthiness of an individual.

Hard Inquiries
Another thing that may come as a surprise in your CIR is hard enquiries. Hard enquiry is one that is made by a financial institution when they get a loan application in order to assess the credit worthiness of the applicant. So each time you apply for a loan, the prospective lender will seek the credit report from the rating agency. This is recorded in the enquiries section of your CIR. So when you apply for a loan or a new credit remember it will generate a hard enquiry which would be recorded in your CIR without you being aware of the implications of applying for fresh credit. However it is important to mention here that when someone wants to check their own score then it is called a soft enquiry and has no bearing on your credit rating whatsoever and is also not reported in the CIR.

Hopefully next time you access your Credit Information Report you would not be surprised by any of the elements mentioned above. Being aware about the basics of credit rating is important for your financial health.

1 comment:

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