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Impact of Late Payment on CIBIL Score

A credit score is a numerical indicator of an analysis of a person’s ability to pay back loans based on his credit history. Lenders like banks and financial institutions use this score to assess a borrower’s creditworthiness. But one of the key things to a good credit score is timeliness of repayment by an individual. Unless you are regular with your payments, it is highly likely that your credit score will go bad and you will be denied fresh loans.

Credit Rating and Information Bureau of India Ltd (CIBIL) is the body floated by RBI and other financial institutions that monitors credit transactions of individuals and commercial entities and maintains a database of credit reports and score.

The lenders can easily assess the risk profile of the borrowers with tools like credit score and credit information report (CIR) and do so affordably and efficiently. This gives them an assurance of responsibility and safety of their credit thanks to CIBIL. It may be noted that CIBIL by itself cannot alter an individual’s credit score. The banks and financial institution must make an adverse report on a borrower for that to reflect on his CIBIL score.

Delayed payments and credit scores

To have a good credit score, it is not only crucial that you pay back the principal with interest, but do so at the time stipulated. There are three ways delayed payments could hurt your credit score and your pocket. These are:

Default makes fund allocation difficult: Lenders also take into account your timely repayment schedule to distribute their funds, and if your default prevents them from lending to other borrowers, then they are justified in charging you a high penalty. By reporting your default to CIBIL, they are essentially conveying your ‘risky’ behaviour to other lenders.

A low CIBIL score can be hard to erase: When banks and financial institutions report defaults, CIBIL updates them on its score and considers it as ‘status quo’ until the bank communicates otherwise. This can be hard to remove and may take months and years of sustained, responsible behaviour by the borrower (by making adequate, and timely repayments) to regain a normal score.

It nullifies your accumulated reputation: Even if you have been a good borrower and paid off instalments timely in the past, one default could erase that reputation from your credit score. As a result, you will find access to credit extremely difficult.

It could hurt your pocket: When you enter into a contract with a bank or financial company for a loan or a credit card, they include steep penalty rates/late payment fees for any delayed payment, and you could end up being the loser.

With the interlinking of most forms of credit with CIBIL scores—be it Personal Loans, Two/Four Wheeler Loans, Home Loans it is now imperative for every borrower to maintain good credit score if they wish to borrow funds for any need.

As a borrower, what steps can you take?

As a credit card or personal loan holder you know that all your transactions are under the scanner by CIBIL and your credit record is liable to get affected if you do not clear outstanding dues on time or make a default.

Come what may, try to settle your credit cards bills in full because a late payment can make an adverse entry on your credit report; one that takes months, even years to get rid of. Similarly, if you make a default on the instalment of your loan, banks and financial institution may make an adverse report to CIBIL.

How to avoid late payments?

If you are a credit card holder or borrower of any type of loan, then you must regard the due date of making repayment/instalment as the absolute deadline.

  • Keep your details updated: Sometimes you may forget to update details like latest address, phone number and email ID with the bank or finance institution and the credit card statement or the instalment notice may not reach you in time. To avoid this, always keep your details updated with the lender so that you can make timely payments.
  • Auto-debit a salary account: If you have a salary account with the issuing bank or any other bank, you may leave a standing instruction with your credit card or loan provider to debit the minimum or outstanding amount by a particular date. This works fine when a borrower is very busy and can’t find time to keep track of your card and loan payments.
  • Spread your credit usage over many cards: If you hold several credit cards, it is wiser to spread your spends across cards rather than concentrating on one particular card. It can help maintain your credit utilisation ratio.
  • Convert dues to EMIs: Some credit cards give the option of converting the outstanding on your credit card into EMIs so if you don’t think you can pay the outstanding in full by the due date, considering converting them to EMIs and paying it on time.
  • Allow buffer time if you pay by cheques or Bill pay: Sometimes customers make payments by dropping a cheque or using third party services like Bill Pay to make payments. But understand that a cheque requires two to three days’ time to be cleared and so do third party payments.
  • Borrow from friends but pay in time: If you do not have the funds but a payment date is fast approaching, you can ask your friends or relatives for a short-term loan to meet the deadline. But skipping the deadline can create havoc with your credit score.

News About Impact of Late Payment on CIBIL Score

  • RBI may ban credit rating agencies to have dual roles

    The Reserve Bank of India (RBI) might soon ban credit rating agencies from having dual roles, as per a report from IANS. Currently, the credit rating agencies in the country have two roles of being an advisor as well as rating agencies for companies. This may soon change as the RBI believes that having two roles is preventing the credit rating agencies from making biased assessments about the financial condition of their clients and restrict conflict of interest that may step in. A number of rating agencies have been questioned by the RBI and other authorities following the IL&FS debt fraud. Credit rating agencies are jointly regulated by both Securities and Exchange Board of India (SEBI) and RBI as these firms rate bank loans and NBFCs, which constitute 70% of their business. 

    As per reports, RBI may soon meet with market regulator SEBI to discuss the concern and plan out new regulations that would impact the way credit rating agencies function. The move comes from RBI after the IL&FS fiasco that has created rippled in the finance sector. Last week, RBI Governor Shaktikanta Das took a meeting with top credit ratings officials, and the deputy governor. They raised doubts over rating agencies' ability to assess credit risk and take timely rating action. 

    12 March 2019

  • RBI criticises credit rating agencies over IL&FS crisis

    The Reserve Bank of India (RBI) has criticised the credit rating agencies for not being able to identity the financial troubles in the companies. The bank has also criticised the companies after the IL&FS scam. They have received sharp criticism from the RBI for failing to identify financial troubles in various companies, especially in the case of IL&FS. RBI governor Shaktikanta Das and the deputy governor had a meeting with to credit rating officials. They raised the concerns over the inability of the credit rating agencies to assess credit risk and take actions. IL&FS defaulted on its loans from banks, mutual funds and provident funds. Various debt mutual fund schemes saw erosion in their net asset values (NAV), because of the defaults.  

    The crisis soon affected other non-banking finance companies (NBFC). Housing finance companies suffered the most along with other NBFCs which have been struggling to sort out their asset-liability mismatches. RBI said one third of the total NPAs (non-performing assets) in the system stemmed from investment grade ratings. RBI is looking in to the issue along with the Securities and Exchange Board of India (SEBI) and is expected to come up with some regulations. The credit rating agencies are registered with SEBI, however, they are jointly regulated by both RBI as well as SEBI as these firms rate bank loans which constitute 70% of their business. 

    9 March 2019

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