By Ruma Dubey

Young and love a good life? Do you swipe your string of credit cards, buying everything and doing all which the mind fancies? That might be good for your happiness quotient but when you decide to buy your dream home and seek a home loan, a bad credit history could jeopardize your chances of getting a home loan. 

And that makes one wonder – how could there be a credit score on him when he has never ever approached a bank for a home or even a car loan? 

Things have undergone a tremendous amount of change when it comes to collecting customer data. Like the developed countries, you might have no credit score only if you have all dealings only in cash, remaining below the radar always. But once again, that in today’s time, that seems difficult. Any trail of credit history you leave behind, you are sure to have a credit history automatically.

Does that mean that if there is no record, your loan is likely to get rejected?  If you have a bank account within the bank, maybe, despite not having any credit score, your loan could get approved. But some banks have made it mandatory to have a credit score and in such a case, you might need to approach another bank for your loan.

Banks, be it PSU or private sector, today rely heavily on credit scores as they are reeling under huge NPAs. In the retail sector, banks, before sanctioning a home loan, check scores with credit bureaus and only if the score is respectable, will they sanction you the home loan.

Credit Bureaus? The biggest in India is Credit Information Bureau of India or Cibil which provides credit scores for individual borrowers.  Cibil, since 2000 has been collecting data from over 800 Financial Institutions, spanning 135 Indians and tarcks 230 million accounts. 65% of Cibil’s data is from smaller towns. And the Cibil score is a 3 digit numeric summary of the credit history. Most retail loan applications, be it for car, home, credit card or personal, all are referred to Cibil. HDFC and Kotak have made it mandatory for a Cibil score before approval of loans.

And Cibil is no small institution.  It was founded, based on the recommendations made by the Siddiqui Committee, by banks and institutions to specifically provide credit scores to help reduce NPAs and discern the good from the bad while providing loans. The biggest shareholder is TransUnion International, ICICI Bank and SBI holds 10% and 5% each is held by IOB, Stanchart, HSBC, Citicorp, Union Bank of India, Punjab National Bank, Central Bank of India, BOI, BOB and 2.5% is held by Sundaram Finance.

Data on Cibil indicates that 90% borrowers who have had the score of 750+ only have been approved of Home Loans, thus that becomes the benchmark. The scale of CIBIL Score is 300 to 900.  And interestingly, one third of Home Loan borrowers are less than the age of 35 in India. The Score tells a credit institution how likely you are to pay back a loan based on your past pattern of credit usage and loan repayment behaviour.  The closer you are to 900, the more confidence the credit institution will have in your ability to repay the loan and hence, the better the chances of your application getting approved.

So if you are planning to take a home loan, there are a few pointers which you need to pay attention to ensure you score better than 750.

1: Ensure there are no defaults or late payments on your existing loans over the past few years because if there has been a lapse, it indicates that you had trouble repaying and that will take a few points off your score card.

2: Best to be prudent while using a credit card. You can swipe it as many times as you want and your scores will get affected only if there is an increase in the current balance on the card over a period time.

3: If you have a higher percentage of ‘unsecured loans’ which could be personal loans or higher percentage of credit cards as they are more expensive and will result in higher outgo through high rate of interest.

4: If you have made many applications for loans, or have recently been sanctioned new credit facilities, a credit institution is likely to view your application with caution as this is labeled as being “Credit Hungry”. This indicates that you are less capable of honouring any additional debt and thus takes off a few marks off your score.

And if you see a score of “NA” or “NH”, it means three things – you are new to the credit system, you have had no credit activity in the last couple of years or you have all add-on credit cards and have no credit exposure. This, per se is good but some credit institutions’ credit policy prevents them from providing loans to an applicant with these scores.

The big question now – how to improve your credit history? As per data provided by Cibil there are a set of seven rules one needs to follow:

Rule 1: Always pay your bills on time.

Rule 2: Keep your credit card balances low.

Rule 3: Maintain a healthy mix of credit - home loan, auto loan and a couple of credit cards.

Rule 4: Apply for new credit in moderation.

Rule 5: Think twice before closing credit card accounts.

Rule 6: Monitor your co-signed and joint accounts monthly as you are held equally liable for missed payments.

Rule 7: Review your credit history 3-4 times a year to avoid unpleasant surprises.