Credit Score is like an alien concept for the borrowers. Normally, a borrower checks the absolute Credit Score Value and create a notion about the same. Some of the credit experts have created a very wrong notion among borrowers. This misconception is that if the Credit Score is more than 750 then NO Force in this world can reject the loan. It is wrong understanding. I can share examples of borrowers whose loans were rejected even with a score of more than 800. There is no doubt that credit score of 750+ is very good but it does not guarantee the loan. In my post, How to read CIBIL Score and Risk Index? i shared basics on how to interpret Credit Score. This post will explain the jargon used in Credit Score. A borrower finds difficult to understand the same.
Before we proceed, always remember that CIBIL report is all about credit worthiness. Creditworthiness is a mix of both credit behavior and credit practice. If you follow good credit practices then your CIBIL Score will be good i.e. more than 750. It does not mean that your credit behavior is good. The loan is approved by considering both credit behavior and credit practices. Cumulatively these factors can be referred as credit worthiness. Now you must be wondering what is the difference between the two. Let’s check out.
Difference between Credit Behavior and Credit Practice
To explain the difference let me share the example of one of my college friend Sandeep (Hypothetical Name). He had a bad habit of borrowing the money from all the friends. The best part was he always used to return the money on time. Therefore, no one ever used to say NO to him. In this case, frequent borrowing is a Behavior. On the other hand, timely repayment of availed credit is Practice. At the macro level, if i am lender i didn’t mind lending to Sandeep as and when he demanded because of good credit practice. Over a period, it reduced his credit worthiness in the mind of lenders. Therefore, after a point, all friends stopped lending him. The reason being, though he was following good credit practice but credit behavior of frequent borrowing was not good.
Similarly, many of my readers complain that they are making all the payments on time still loan is rejected. I agree that they are following good credit practices. At the same time, they fail to check whether their credit behavior is good or not. At the macro level, credit worthiness of a borrower should be good. Also, note that there are some factors that do not affect your Credit Score. The reason i shared brief on credit practice and credit behavior because the following jargon will help to understand both these terms.
Credit Score – 7 Jargon You Should Know to read CIBIL Report
For DPD section details, you may check my post DPD in CIBIL Report. Rest all jargon are explained in this post.
1. Restructured Loan: When a borrower finds difficult to pay loan due to any emergency situation like job loss, health issues etc but the intent is not to default. In such cases, a bank may offer you to repay the loan at revised terms and conditions. The key objective is to reduce the EMI to avoid default. Therefore, the bank may increase the loan tenure or reduce the interest rate. Restructured Loan is reflected in Credit Score.
Certain loans are restructured based on Govt mandate. For example, after a severe drought in parts of Vidarbha region of Maharashtra. The Govt restructured loans by reducing the interest rate. Such loans are reported as Restructured Loan (Govt mandated). In my opinion, Govt mandated restructured loan does not impact credit score of a borrower.
2. Written-Off (WO): The first objective of a bank in case of default is to recover the amount. If all the efforts fail and the bank is not able to recover the dues then it is reported as Written-Off (WO). Banks cannot retain NPA’s in their book of accounts forever therefore these type of loans are written-off in accounts. In short, they are not carried forward. Here WO means Written-Off. The written-off status is subdivided into Written-Off (Total) and Written-Off (Principal). In the case of total, the 100% amount is written-off including principal and interest. In Principal, total principal amount written-off is reported. Basically, the objective of reporting these 2 sections is to find out written-off interest. For example, if Written-Off (Total) is 20L and Written-Off (Principal) is 8L then Written-Off interest is 12L.
3. Settled: There is a misconception among borrowers related to settled status or settlement. A borrower thinks that after settlement his/her Credit Score will improve drastically. Please note that it is not true. Let’s take an example, assuming i defaulted on Credit Card payment of Rs 40,000. Bank will charge certain penalties and interest on amount defaulted. Assuming total amount due is Rs 1,00,000. As a defaulter i am not willing to pay Rs 1,00,000 then the bank will offer me a settlement. The objective of the bank is to recover the principal amount due and cost. Therefore, depending on the situation bank may offer to settle the account for Rs 50,000. Balance Rs 50,000 will be waived off. In short, as a borrower, i have not cleared 100% dues of the bank.
4. Post (WO) Settled: This status is also similar to the settled but only difference is that settlement was done after the account is written-off. In short, the bank has already written off the amount and after that defaulter approached for settlement.
5. Suit Filed or Wilful Default: In layman terms, wilful default means defaulter has the financial ability to pay and clear the loan but the default is intentional in nature. Recently, Vijay Mallya was declared wilful defaulter by some of the banks. In short, he has money to pay but don’t want to pay. In such cases, as per RBI’s guidelines, the bank will report either of following status in your credit report.
(a) Blank means no suit filed
(b) Suit Filed
(c) Wilful Default
(d) Suit Filed (Wilful Default)
6. Ownership Type: Recently one of the readers was confused about “Authorized User” status in a credit report. Therefore, i thought of clarifying this point. There can be 4 types of ownership
Single: I am only responsible for clearing the dues against loan account
Joint: Like in the case of a joint home loan. Here joint also means more than two borrowers. In short, the borrowers share a joint responsibility to clear the dues.
Authorized User: This status is reported in Credit Score for Add-on Credit Card holder. It shows that you are using a credit card but not responsible for its payment.
Guarantor: I have explained it in details in my post, Being a loan guarantor, Are you risking your future? In short guarantor promises to repay the loan in case the original borrower defaults.
7. Account Sold/Purchased: Last but not the least. Banks sell NPA accounts to ARC (Asset Reconstruction Company) or Collection Agencies. These accounts are mentioned as Account Sold or Account Purchased as the case may be. Generally, defaulters are not able to trace the mother account if the account exchanges hand multiple times. For example, recently i helped one of my clients to trace mother account of ABN Amro Credit card. ABN Amro Bank sold credit card business to RBS (Royal Bank of Scotland). After few years, RBS sold it to RBL (Ratnakar Bank Limited). Subsequently, RBL sold it to ARC named Phoenix. It’s an exercise in itself :). The worst part is that details of mother account are not reported in Credit Score.
Words of Wisdom: I have shared key terms/jargon used in Credit Report. There are lot more terms in your credit score but i think those are self-explanatory. I only shared the terms that borrowers find difficult to understand. Before you take any action to improve CIBIL Score, it is imp to understand the status of the account. Only, in that case, you will be able to take right steps.
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