Today, borrowing is not a daunting task. By meeting certain criteria, you can buy a car or a house in a month's time. This instant gratification of desire is due to advance systems, which are in place and give fair consideration to the repaying capacity of the buyer. As lenders prefer to objectively assess each loan application, 'Credit Score' of a buyer becomes important among other things.
For the uninitiated, credit information bureaus collate information provided by member institutions—these are the institutions from which many an individual borrow, and rate the borrower's lending track record by giving him a score, popularly known as credit score. Credit Information Bureau of India (CIBIL) is one such bureau that offers a credit score. In essence, credit score gives a summary of your credit history. A credit score gauges the paying capacity of a buyer in the range of 300 and 900 points. Your credit score is considered to be good and strong when it is closer to 900 points. In such case, banks or any other lending institution consider you as a good potential customer.
Though this concept is relatively new in India, in developed countries such as the US and the UK, this concept plays a key role in retail banking business. Lenders in these countries base their lending decisions primarily on the credit score of the applicant. A strong preference is given to applications filed by individuals with a good credit history captured by high credit scores. Banks offer lower interest rates to individuals with high credit scores, to ensure that their asset book consists of good quality loans. Borrowers with relatively high credit scores too use their credit scores to their advantage by negotiating with banks on rate of interest and charges.
At present, in India, the practice of considering the credit score of a borrower is gaining importance. In India, credit score above 750 is a good score. A CIBIL study reported that 88% of new home loan borrowers in 2011 had a cre! dit score of 750 and above. In India, though banks don't express their intentions in considering the use of credit score, there are preferential treatments given to borrowers with good credit score. There are a few small steps that are being taken to ensure that the borrower with good credit history scores an edge over borrowers with low credit score. Especially in case of balance transfer of home loans, banks are keen on credit score of the borrower.
High credit scores help banks identify disciplined borrowers in home loan balance transfer segment. Banks are keen to attract borrowers with high credit scores to ensure that their loans are repaid on time. There are cases where banks have offered lower interest rates for such borrowers. In some cases, the banks have also offered discounts on processing fees and other incidental charges. There are two types of costs in a loan transaction. First, the financial costs the rate of interest, and charges the borrower pays to the bank. The charges include, loan processing fee, form fee, etc. Second, costs in terms of time and effort to get the loan. There are umpteen cases where the borrowers don't mind paying a few basis points more in interest rates if a bank is willing to offer them a 'quick' loan. In the bargain, the bank gets a few basis points extra for the money lent. A smart borrower with a good credit score may enjoy the best of both worlds - quick loan approval and still he may not have to pay that bit extra rate of interest.
Banks have been revisiting their loan approval processes. For example, a bank may choose to do only one field investigation for a loan applicant with a good credit score against two field investigations for a loan applicant with a poor credit score. It is estimated that the time taken for disbursal of a loan application backed by good credit scores can be a day or two, whereas for rest of applications it may be a week or two. This works more in case of unsecured loans such as personal loans. In th! is type o! f loans there are little 'legal and technical checks' such as valuation and title ascertainment of property which happens in home loans. And hence a good credit score can get you a quick personal loan without paying more.
A credit score thus can help you to access credit at economical price and more importantly in lesser time and a few hassles. After all, having a good credit score also speaks volumes of the kind of a person you are. The more disciplined and conscientious you are in paying your credit on time, better is your credit score. Hence, you should be careful with your credit score and learn to use it to your advantage.
The writer is a Co-founder & Director at www.creditvidya.com .
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