Thursday, 7 September 2017

Most Reader's Question: Utility Bills and Credit Reports

Here are two common questions that a lot of readers might have:
What impact does delay in paying personal loan installment have?
Nonpayment of a personal loan EMI will attract interest on delayed payment till the time the missed amount is not paid and also a fine imposed by the lender. There will be an adverse impact on the credit score as well.
What happens if you don’t pay your telephone bill?
Depending on the utility provider’s policy the customer is levied a fine and in case the payment is not made after repeated reminders there might be a disruption in service. However this has no impact whatsoever on the credit rating.
Credit Scoring in India currently takes into account credit card and loan installment repayments as illustrated by the example above.  However globally this is not the practice as utility bill payment history for electricity, telephone, water is also included in the credit report and is used to calculate the credit score. Thus both lender data (loans and credit cards) and non-lender data (utility payment details) affects the credit rating of an individual. Often there may be confusion about inclusion or exclusion of utility bill payment records in the credit record and here we will try and get some clarity on that. In India currently utility bill records are not a part of the credit scoring model.
Utility Bill Payments Inclusion in Credit Reports: The Way Forward?
Utility bill payments and insurance premium payment records are known as alternative data sources and just like EMI and credit card payments can be used to assess the creditworthiness of an individual. This is useful for the lenders as well as prospective borrowers who may find it difficult to get loans as they do not have the required credit trail. Even if somebody does not have any loans or credit cards they in all probability would have a telephone, water and electricity connection. Thus inclusion of payments records of utility bills and insurance in CIBIL Report will help those in the lower economic strata, those new to credit and also those who have just started working to have a credit rating with the use of alternative data sources.
This benefits the prospective lenders as unlike before the lenders will not shy from giving them a loan or a credit card due to lack of a credit trail. Thus people who have found themselves on the fringes of organized credit can now have access to it. Thus they can now dream of buying a house, a car, start a business or get higher education with the help of a loan that otherwise would have been denied to them.
For the lenders it opens a whole new market as earlier the probable customer pool would have been limited. Since more people’s credit worthiness can be assessed based on alternative data so the lenders can expand their customer base. Also inclusion of alternative data can provide a better picture of the creditworthiness of the applicant so lenders can take better informed decisions. So for the lenders the benefit is twofold; a bigger market and better assessment of the applicant.  Getting a loan with a low CIBIL Score or no credit trail can be a challenge and this to an extent can be overcome by the use of more ways of credit behavior assessment as explained above.
The Indian Perspective:
Keeping in line with international practices recommendations have been made to include the records of utility bill and insurance payments also in the credit score calculation. However before this becomes a reality the service providers for telecom and electricity have to agree to share data and also work out the legal and practical aspects and implications of this decision.  Thus it is possible that in future that not paying electricity bill or telephone bill on time could also impact your chances of getting a loan sanctioned.

Whether all of the aspects will be given similar weighatge or will it vary and whether the utility providers will also base giving their services (as in many countries abroad) to new customers on their credit profile are all modalities that will have to be worked out.  However whether or not the utility payment records are included in credit score calculation or not it is always a good practice to always pay your dues on time.


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