Credit Score is nothing but the creditworthiness of a person i.e. his/her ability to repay the loan/debt or we can say that higher the credit score, lower the risk of default by borrower & vice versa As i have mentioned many times in my previous posts that we Indians are very good in copying the alien concepts without understanding the core concept (No offence to anyone). India’s CIBIL Transunion score is one such example, its a copy of American Credit Score concept i.e. FICO (Most widely used credit score model in USA). FICO provide two credit scores because America has two national credit bureaus i.e. Equifax and Transunion.
CIBIL has tied up with Transunion to provide Credit scores in India. CIBIL Credit score was launched in India but not in true spirit. Universally there are 2 objectives of a credit score
1. To provide cheaper credit i.e. at Low interest rate to customers with High credit score (Low Risk)
2. To fix credit eligibility depending on Credit Score. Higher the credit score, higher the credit availability i.e. higher loan eligibility
In India none of above mentioned objectives are followed by Financial Institutions. Indian Financial Sector works on principal that one size fits all. Customer A with CIBIL score of 750 is also paying same Interest rate as Customer B with CIBIL Score of 850. Secondly Loan eligibility is fixed depending on Income of a person. Though income is most critical criterion to fix loan eligibility but should not be the sole criterion.
Now question arises, why we have credit scores in India? Answer is very simple to Blackmail/Harass Borrowers. The fate of a Borrower is only hanging on 1 string which is called CIBIL Credit Score. 90% loans approved in India are disbursed to Borrowers with Credit Score of 750 or more.
In majority of cases (Low CIBIL Score), Borrower is not at fault. Some of the Best (Read “Worst”) practices followed by Financial Institutions/Banks to spoil, rather i will say destroy individual’s credit score are
1. Non-Updation of CIBIL database in case of Loan / Credit Card Closure:
This is the most common reason for low credit score. Financial institutions are proactive to report default but lazier then tortoise to report closure of Loan/Credit Card account. It is important to note that you might have cleared all your dues but till the time Financial Institution/Bank close your account in CIBIL database, it might keep impacting your Credit Score Adversely. In my case, i had ICICI credit card and closed the same after clearing all dues. When i was planning to take Home Loan then i decided to pull my CIBIL score to avoid any surprises. I found that ICICI has not updated CIBIL regarding closure of my credit card. I complained to CIBIL and they requested me to contact ICICI directly. I registered my complaint with ICICI and also requested to issue No Due Certificate against my credit card. ICICI customer care assured me to update the CIBIL database within 15 days. After couple of follow ups, my CIBIL database was updated by ICICI. The key point is that it is the responsibility of a borrower to follow up and get the details updated.
2. Unsolicited Credit Score Queries for Credit Cards:
I am the sufferer of this malpractice. According to me biggest culprits are ICICI & SBI (GE Money). These 2 great institutions have pulled out my credit score 5 times from CIBIL database in last 5 years whereas i never applied for any Credit Card with ICICI and SBI in last 5 years & 4 years respectively. ICICI has checked my CIBIL score for amount (enquiry amount) as low as 100 Rs & 500 Rs, which is adversely impacting my credit score. Though i requested numerous times in this regard but without any success.
Best example is credit card, If customer dispute on any charge not discussed with him before issuing the card. The best tool with Financial Institution is to report default in CIBIL Database.
4. Wrong Entries:
Many cases are reported wherein wrong entries are made specially if the name is same for 2 individuals. One of my reader applied for an Auto Loan and his loan was rejected due to poor CIBIL score..When he checked in detail then he found that credit card default of some other person with same name was updated in his credit report. It took him 8 months to get it corrected..You can imagine the mental agony faced by him.
Now all said and done, if there is an Error in your report then it is your responsibility to get it corrected through Bank or Financial Institution. No one will come to your rescue. CIBIL does not take any responsibility or onus for correctness of data provided. It means that Banks or Financial Institutions have free hand to design ur report as per their wish.
In ideal scenario, there should be proper mechanism in place to address the Borrowers grievance in case of any error in CIBIL report & there should be penalty clause, if Banks or Financial Institutions report wrong data to CIBIL plus they should compensate customer for Financial Loss & Mental Agony. If we don’t take proper steps at this stage then CIBIL credit score will soon become monster for borrowers.
Lastly, in my personal opinion CIBIL score should be used only for unsecured loans like Credit Card or Personal Loan whereas for secured loans like Home Loan, it is not required becoz Banks or HFC’s keep the original documents with them as a guarantee or surety. In simple terms, Bank is providing Loan at same interest rate to all customers and loan eligibility is fixed based on Income criterion. Bank is also having a custody of all original documents as a surety then what is the need of CIBIL Score, If borrower will default then Bank can easily recover its money. Unfortunately it might not happen becoz CIBIL Score is a tool in hand of Banks & Financial Institutions to Blackmail Borrowers.
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