Founded in 2000, CIBIL or the Credit Information Bureau of India Limited (CIBIL) has a record of individuals’ loans and credit cards. A CIBIL score, therefore, is one of the important parameters to gauge an individual’s ability to repay a loan or ascertain his creditworthiness. There are several factors which can negatively affect a good CIBIL score including the frequency and severity of late payments which begs the question: does every single missed payment impact your score?
Financial discipline is the key
More often than not, most of us underestimate the importance of timely payments and, therefore, end up paying our bills past the last date. It does not augur well for you in terms of your financial discipline in the long-run. With the advent of credit bureaus such as CIBIL, you delay payments of your bills at your own peril.
Effect of delayed or missed payments on your credit rating
A single missed payment can reduce your CIBIL score and thereby decrease your credit worthiness. Banks and other financial institutions might turn down loan requests while credit card companies which periodically review their customers’ profiles might reduce the credit limit on a card if the CIBIL score is low. Credit card issuers would like to ensure that your payment record is clean before they offer you higher credit limits.
Minor and major defaults
The Devil is in the details. Customers would do well to understand the difference between minor and major defaults.
Payments delayed or missed for a period of less than 90 days are considered minor defaults. As a result, your CIBIL score does take a permanent beating but is affected temporarily.
However, if you fail to make payments beyond 90 days, your account falls under the NPA (non-performing assets) category. In case of major defaults such as this, lenders wouldn’t touch you with a bargepole.
In both scenarios (major and minor defaults), loan eligibility of a customer gets affected. In case of a minor default, you can ensure that you pay subsequent bills in a timely manner to see your CIBIL score recover.
There is a view that a single payment delay will not have a huge negative impact on your CIBIL credit score provided you can make up for the time lag. However, it all boils down to the timing and the frequency of your missed payment.
A couple of missed payments may only affect your score for a short period but if you don’t make a missed payment for six months and plan to apply for a loan, your chances of getting a loan approved are miniscule.
Of scores and percentages - What is a good credit score?
According to data shared by CIBIL
- For individuals with a score ranging anywhere from 650 to 699, the percentage of loans sanctioned stood at 5.2% last year.
- For individuals with a credit score ranging from 700 to 749, the percentage of approved loans was 9.7%.
- For individuals with credit scores of 750 t0 800 and above, the percentage of loans sanctioned stood at 57.6% last year.
How payment delays affect your credit rating
Smriti Thakur, a Jaipur-based banker, bought a two-bedroom apartment a couple of months ago. Smriti who has a small car, has been waiting for an annual raise by her firm, to buy an SUV.
Smriti’s CIBIL score was around 750 when she bought her first car two years ago. However, when she decided to apply for a loan for an SUV, her application was rejected, much to her dismay. Her bank informed her that they could not process her application owing to her low CIBIL score in addition to a few remarks on her credit report.
Consequently, Smriti found out that her personalised CIBIL score was 610. After she perused her bills and payment record, she discovered that she was guilty of make late payments on her EMIs on her car loan. She was also responsible for delayed credit card payments.
Fixing your CIBIL report
Smriti (in the above example) learnt the hard way that it is always advisable to review one’s credit history on a regular basis to avoid getting rude shocks from banks and financial institutions. There are several other precautionary measures one can take such as ensuring a healthy credit mix, in that it is always prudent to have a combination of secured (home, auto loans) and unsecured (personal loan, credit cards). Low utilization of credit and not being ‘credit hungry’ also help in improving your CIBIL score. One would also do well to monitor joint accounts on a monthly basis since you will be held liable for missed payments.
If you are closing a credit card account, make sure you get a no objection certificate (NOC) from a credit card provider. Credit cards are closed only after NOC is received from the bank. Your CIBIL database should, therefore, be updated by the bank within 45 days. If you don’t check to ensure that the process is on track, your CIBIL score will take a beating for no fault of yours.
While it takes years to build a strong credit record, it only takes a few instances or lapses, intentional or otherwise to damage your credit history. With credit checks gaining greater importance in the Indian financial system, financial diligence and discipline are key to maintaining a high CIBIL score.