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Missing a Single Payment Can Affect Your CIBIL Score

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.
It is, therefore clear that a high CIBIL score would only increase your chances of getting a loan.

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.

News About Missing a Single Payment Can Affect Your CIBIL Score

  • Securitisation market records Rs.50,300 crore in Q1 2019

    Credit rating agency ICRA stated that the Indian securitisation market clocked the highest issuance volumes seen in the first quarter of any financial year at Rs.50,300 crore in the April-June (Q1) 2019 quarter, recording a 56 per cent year-on-year (y-o-y) jump over the same period in the previous fiscal. The agency said the securitisation market continues to soar as the liquidity crisis in the non-banking finance companies (NBFC) sector. In Q1 FY20, mortgage loans constituted the largest asset class with around in direct assignment market and around 46% share. Meanwhile, other asset classes like micro loans had a share of around 20% and vehicle loans constituted for around 17% share. Investors continued to invest owing to priority nature of these assets, added ICRA.

    Public sector banks continue to remain the largest investor segment demonstrating strong appetite for acquiring both priority sector lending (PSL) and non-PSL assets through retail loan portfolio buyouts. Mortgage loans constituted the largest asset class with around in direct assignment market and around 46% share in Q1 FY20. Meanwhile, other asset classes like micro loans had a share of around 20% and vehicle loans constituted for around 17% share. Investors continued to invest owing to priority nature of these assets, added ICRA The credit rating agency revealed that the Indian securitisation market, in the June FY20 quarter recorded the highest issuance volumes seen in the first quarter of any financial year at Rs.50,300 crore, registering a year-on-year (y-o-y) growth of 56%. Meanwhile, in Q1FY19, the securitisation volumes were Rs.32,300 crore and Rs.1.99 trillion for the entire FY19.Other dominant asset classes include mortgage loans, small business (MSME) loans, micro loans and tractor loans.

    18 July 2019

  • SEBI Wants More Transparency in Credit Rating Market

    Earlier this month, SEBI (Securities and Exchange Board of India) prescribed guidelines to strengthen the disclosures made by credit rating agencies to enhance the rating standards. The market regulator has urged credit rating agencies to include the probability of default (PD) benchmarks for debt instruments. The new initiatives come from SEBI at a time when the non-banking finance companies and the lending market have witnessed several debt defaults and rating downgrades. The aim of the new directives is to enhanced disclosures, thereby helping investors in making better investment decisions. As per the SEBI guidelines, credit rating agencies in India will have to clearly state the sensitive factors that could impact the credit worthiness of the entity. Further, rating agencies will have to adopt a standardised terminology to disclose liquidity indicators like liquid investments, access to credit and cash flows among other factors while rating an instrument.

    The market regulator has called for having a uniform Standard Operating Procedure (SOP) in respect of tracking and timely recognition of default. The same has to be disclosed on the website of each CRA. The SEBI circular has mentioned that, “In order to enable investors to discern the performance of a CRA vis-à-vis a standardised PD (probability of default) benchmark scale, CRAs, in consultation with SEBI, shall prepare and disclose standardised and uniform PD benchmarks for each rating category on their website, for one-year, two-year and three-year cumulative default rates, both for short-run and long-run". Focus on liquidity indicators SEBI has asked credit rating agencies to comment on the liquidity available to a company. This is mainly due to the absence of liquidity which can have a marked impact on the realisable value of an asset at the time of its sale. Learning from the experience garnered over the last two quarters, SEBI has now specified liquidity indicators that need to be disclosed as: Superior/Strong, Adequate, Stretched, and Poor.

    26 June 2019

  • CARE tweaks Reliance Home Finance Ltd's rating to A+

    Reliance Home Finance Ltd.’s credit rating has been revised to A+ by CARE. The credit rating agency has changed the company’s rating from A to A+. The A+ rating has been given to Reliance Home Finance Ltd’s long-term debt program, market linked debentures, subordinated debt and non-convertible debentures (NCDs) public issue. Meanwhile, the A rating has been given to upper Tier-II NCDs. The credit rating agency stated that the revision of rating has taken owing to revision of rating of the parent company, Reliance Capital Limited and moderation in liquidity profile of the company. 

    7 March 2019

  • Moody’s says India will struggle to maintain 3.4% fiscal deficit in 2019-20

    India will struggle to meet the fiscal deficit target of 3.4% in 2019-20 as higher oil prices will add to short-term fiscal pressures, as per Moody’s. The credit rating agency also stated that the government will struggle will find it difficult to maintain higher spending and low revenue growth. Said a report from PTI. Gene Fang, Moody's Investors Service Managing Director, Sovereign Risk Group, said the country’s debt is high as a percentage of GDP and it could be brought down only if the Centre sticks to the fiscal consolidation path. The credit rating agency said the country's 'Baa2' rating has a 'Stable' outlook, which indicates a balance of upside and downside risks. As per the FRBM Act, the debt-to-GDP ratio was to be brought down to 40% by 2024-25 from 50.1% in 2017-18. The government of India has pegged the fiscal deficit for the next financial year at 3.4% of GDP, as against the original target of 3.1% per. Fang told PTI that the 3.4% fiscal deficit target for the year ending March 2020 is wider than expected, largely driven by increased spending to provide income support to small farmers and tax rebates ahead of the general elections in April-May this year. In 2017, Moody's had upgraded India's rating to Baa2 from Baa3, changing the outlook to 'stable' from 'positive', and said that reforms will help stabilise rising levels of debt. 

    4 February 2019

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