Do you know your credit score?

An individual relies on credit at multiple occasions during his life span.  It can be to purchase a home or to finance an education, or at times it can even be to finance emergency cash flows.  While few of us are lucky to have rich friends and relatives who can give us loan without asking any questions, most of us have to approach a bank or financial institution for any loan.

Before sanctioning the loan, these institutions look at your profile to judge your capability to repay the loan amount.  This is done based on various documentary proofs like income tax returns, salary slips, balance sheet, etc and other details which you provide to them.  In addition to this, they also rely on an important external document which provides your credit history.  This document which they receive from CIBIL (Credit Information Bureau (India) Limited) gives information about your credit history and also provides the credit score based on which the institutions can make informed decisions.

What is CIBIL?

CIBIL was incorporated in 2000 with ‘an aim to fulfill the need of credit granting institutions for comprehensive credit information by collecting, collating and disseminating credit information’ about the borrowers to its members.  It members are banks, financial institutions, non-banking finance companies, housing finance companies and credit card companies.  These members share the data about their customers with CIBIL and in return, CIBIL gives access to Credit Information Report (CIR) of a particular individual to these members.  CIBIL prepares the CIR by collating all the information received from its members and provides a comprehensive snapshot of a borrower’s credit history

For example:  Suppose you have an education loan from State Bank of India and are using a credit card of ICICI Bank.  Both these institutions will submit details about your account to CIBIL on a monthly basis.  Now assume you apply for home loan with HDFC.  As a part of process for sanctioning your loan, HDFC will approach CIBIL to obtain your CIBIL Score and CIR which will provide an overview about your credit history.  Your CIBIL Score will depend on your timely servicing of education loan and credit card dues.  HDFC Bank will take this in to account before taking a decision on sanctioning the home loan.

Thus both CIBIL and its members relies on information sharing between themselves and act on the principle of reciprocity.

What is CIR and Credit Score?

CIR is the factual record of your credit payment history compiled from information received from CIBIL members.  It contains your basic information; details about all the credit facilities availed, past payment history, amount overdue, current status, etc.  It also contains details about enquiries made by a financial institution for your credit report.

CIBIL Score is a 3 digit numeric summary of your credit history.  This score is derived based on the details found in the CIR.  The score ranges from 300 to 900.  Higher the score, more favourably your loan application will be viewed by the financial institution.

How it impacts me?

An institution takes this score in to account before deciding on sanctioning the loan.  Your credit score indicates the probability of default based on the credit history.  Thus bank will be able to know whether you are capable of and will actually repay the loan.  In case the credit score is not favourable, the institution can reject the loan application or may sanction the loan with lower amount or with higher rate of interest to safeguard its risks.  Thus it is in your interest to ensure that your credit score remains high.

How is my credit score determined?

This brings us to how the credit score is determined.  Following four factors plays a major role in deciding your credit score:

1.    Late payments or defaults in recent past:   Any late payments or defaults you made in past will adversely affect your credit score.

2.    High utilisation of credit limits: High outstanding balances on loans and increasing balances in your credit card indicates increased repayment burden and hence negatively affect your credit score.

3.    Higher percentage of credit cards or personal loans:  Credit card dues and personal loans are unsecured loans whereas home loans and auto loans are secured loans.  Higher the proportion of unsecured loans, lower will be your credit score since unsecured loans are more risky and have high rate of interest leading to high repayment burden.

4.    Behaving ‘credit hungry’: In case you have made multiple applications for loans or have been recently sanctioned new credit facilities, it needs to be viewed with caution.  This indicates that your debt burden is likely to be increased and your capacity to honour any additional debt may deteriorate which impacts your credit score.

Thus to ensure your credit score is favourable, one needs to diligently make all the EMI and credit card payments on time and try to avoid taking loans for mundane purposes.

Can I know my credit score?

Yes. CIBIL allows you to obtain your score and CIR so that you can have a look at your credit rating.  In case you want to view your score along with CIR, it will cost you Rs. 450 whereas only CIR report will cost you Rs. 142.  Payment can be made online or through Demand Draft.  You need to fill up the request form and provide identity and address proof and submit the documents to CIBIL.  On receipt of documents and payment, CIBIL will send you across your credit score and CIR.

“Written Off” or “Settled” status

In case the report mentions that any of your loan or dues are ‘written off’ or ‘settled’, it adversely affects your credit score.  Write off indicates that you have not made payment on your outstanding loan / dues for more than 180 days.  Whereas in case you settle the outstanding with an institution for lesser amount than original due, your account appears as settled.  For eg: You owe Rs. 1000 to a credit card company, whereas you settle your account by paying Rs. 800, the credit card company will report your account as settled, reflecting you paid less amount than actually due to them.  Since both these statuses can impact your credit score, you need to ensure that there are no write offs and settlement to your loan account.

How to rectify information in CIR?

In case you find that any information in the CIR is inaccurate, you can approach CIBIL to rectify the same.  You need to identify the error in the report and write to consumerqueries@cibil.com with your query.  You further need to contact the concerned institutions against which the error is reflected and inform them about the error.  You will be required to provide necessary proofs to substantiate your claim.  Once the institution acknowledge the error and rectifies it, CIBIL will update the information based on revised data received from the institution.

Financial Discipline

Since credit score will determine your future borrowings, it is important to ensure that all the loans taken are timely paid up.  Further one needs to restrict oneself from taking loans for mundane purposes and check his spending habits to have control on credit card dues.  Financial discipline will go long way to ensure good credit score.

More details about CIR and Credit Score can be found at CIBIL website.

Where you aware about the concept of Credit Score and that all your loan request first get scrutinized for credit score?  Have you ever obtained your credit score? Do share your views and comments on this article below.

Checklist for your financial shopping

Last couple of weeks Mint had carried checklists for various financial products which one needs to fill up and understand before purchasing them.  The checklist ranges from choosing an insurance plan to a credit card.  

The ideal way will be to make the agent / relationship manager selling the product to sign on the checklist after all the details have been filled up and before purchasing the product.  This will force him to provide accurate facts about the product he is trying to sell to you and also help you to understand the key terms & conditions of the product better.  Later in the case of any dispute or doubt, you can refer to the said checklist.

Given below are the links to various checklists for your reference:

Sr. No.	Financial Product	Link
1.	Mutual Fund Investments	http://goo.gl/3K7L7
2.	Life Insurance	http://goo.gl/Bruy3
3.	Health Insurance Products	http://goo.gl/Qc5w6
4.	Auto Insurance Products	http://goo.gl/k6x3k
5.	Credit Cards	http://goo.gl/6HxLl
6.	Home Loan	http://goo.gl/98TAv
7.	Real Estate Deals	http://goo.gl/J8YWY
8.	Travel Packages	http://goo.gl/ztNtC

This is an excellent initiative by Mint and will benefit the consumers of financial products to a great extent.

Do you required a similar checklist for any other products?  Would you like to add more points in any of the checklist above?  Please provide your responses in the comments section below.  Thanks.

Original Source: Mint

Best time to do tax planning

Samy went to his friend, Aseem’s house on Sunday evening, a day after India’s historic win in cricket world cup.  Aseem’s afternoon siesta was well extended till evening hours.  Samy commented “Seems that you had a big party last night after the finals.  You look pretty tired.”

Aseem smiled and said, “Yeah, last night was a gala party.  After all, my favourite, Dhoni played a role of sheath anchor.”  He was very happy with the performance of Indian team.  He added “However, the tired look has more to do with the year-end pressures at office rather than the party.  Last couple of weeks was very hectic with year-end sales target and pending tax related investments.  Add to it the exciting world cup matches.  It has taken a toll on me.”

“I can understand the year-end sales target, Aseem. But what you meant by pending tax related investments?” Samy curiously inquired.

“That is 80C investments which we are required to do.  Plus I had to submit medical bills and home loan certificate to claim tax deductions.”

Samy nodded “Yeah. This is also a priority otherwise extra tax gets deducted from our salary without any liability.  So where did you invest?”

“I had this agent who was calling me repeatedly since last two months for tax related investments.  He helped me out in buying this insurance cum investment plan, so that I get the twin benefit of insurance and investment….oh… not twin but triple benefit…of tax deduction too.” Aseem smiled.

“But I recollect you said once you had adequate term cover for insurance. Isn’t it Aseem?”

“Yes, I do pay the premium for term insurance.  But it is not sufficient enough to get entire tax benefit.  Hence I was thinking to invest additional sum in PPF or other investment products.  But this agent convinced me this insurance plan has market linked returns and it will be higher than PPF returns.” Aseem said justifying his investment “Hence I opted for it.”

“Aseem, I am not sure whether this was the best product for you to invest.  But one thing I can surely say is that your agent took the advantage about the lack of time and made you to invest in a product for which you were not having adequate knowledge.”

“Yeah.  I agree that due to lack of time, I did not do adequate research on the product which he sold to me and trusted on his assurances.” Aseem acknowledges.

Samy adds “And you could have avoided all this had you started your tax planning earlier.  In fact, I would suggest this is the right time for you to start the tax planning for the next year.”

Aseem had a surprised look on his face.  He argued “April is too early.  May be December or January is the best period.”

“December – January is good time to think about tax planning, but it is not the best time.  In case you had started your tax planning early last year, say in April, you may not have gone for that inappropriate insurance cum investment plan.  Furthermore, you could have concentrated more on your year-end sales target.

“Starting early has its advantages.  One is it gives you time to compare various alternatives available and decide which is the best option for you.  The agents are also not behind us during this period to bias our investment making decisions.  Second since you have already decided on the choice of investments, you can start spreading your investment throughout the year.  Thus you do not have any major cash outflow at the later end of the year.  In case of any market linked investments, it also helps in averaging the purchase price during volatile markets.  Third, having your tax planning done at the outset, you estimate what you will be earnings during the year and helps you know the yearly tax outgo.  Thus you have better financial visibility.”

Aseem agreed “Yeah.  You have a point here.  May be I should use this opportunity and start my tax planning for this year immediately.”

Samy smiled and gave thumps up “Yes and do let me know in case you require any assistance in tax planning.”