15 Mar 2017

Importance of CIBIL Score and Risk Index and their Calculation

One important thing to be noticed by the money lending institutions before lending money to any borrower is the risk involved in lending to that particular borrower. And this is assessed by help of CIBIL score or risk index calculation. These two assessments carefully track the past credit history and on basis of the same provide a borrower with CIBIL score or risk index. Which further suggests if the borrower is fit to be lent or not

CIBIL score and risk index are the primary level of short listing the long list of money borrowers. However the money lending institutions cannot leak the criteria of short listing the borrowers as it would create commotion and panic among the borrowers. Sometimes when the CIBIL score or risk index are not in good shape then some institutions and websites offer the borrower a chance to improve their CIBIL score by paying additional amount of money (keep in mind that this is of no use as top money lending institutions would ultimately look for your past records, basically 6 months). CIBIL score is analyzed o the basis of credit history of the last 6 months, the offered is basically between 300-900 whereas the risk index is calculated where the borrower is having a credit history of less than 6 months or no credit history. The risk index is offered from 1-5.

CALCULATION AND NATURE OF CIBIL SCORE/RISK INDEX

In case of assessing the borrowers, they are all put into 3 major categories;

  1. Individuals with no credit history or no data available to CIBIL:

In this case the index is notified as NA (not available) or NH (no history). Anyways this is not considered as low score by any means, yet some institutions don’t lend money if an individual has no credit history as the person is a total surprise with no negative points yet has a lot of risk involved.

 

  1. Individuals with a credit history of less than 6 months:

In this case CIBIL offers risk index to the individuals as per the nature of their credit history. Risk index is marked between 1 to 5 and the lower the number the greater the risk and the greater the number, much is a possibility of being awarded with a loan.

è Index 1 and 2 refer to a situation of high risk.

è Index 2 denotes medium risk.

è And index 4 and 5 denote lesser risk 

  1. Individuals with more than 6 months of credit history: 

In this case individuals are marked with CIBIL scores. The higher the score obtained the lower is the risk involved and vice-versa. To categorize:

  • Score 300-600 is considered enough to get the loan proposal rejected.
  • Score 600-700 is just OK. And the decision is solely in the hands of the bank.
  • Score 700-775 is considered good enough.
  • And score above 775 is considered to be an account of flawless credit history of the individual. 
  • There are around 70 different aspects that are taken under consideration for assessing the CIBIL score of an individual. As cases of exception, some individuals with very high CIBIL scores can also be denied of their loans as the “BANKS” have always been infamous for their overcautious nature. They may ignore all the good points of a credit history and stick to a single mistake made by an individual in the past.

Hence you don’t just need good CIBIL score/risk index but also a pinch of luck to be awarded with a loan from a bank.

15 Mar 2017

Secured credit card- Repair CIBIL score

A secured credit card unlike a normal credit card is backed by a deposit amount which acts as collateral for the credit provided with the card. The credit limit depends on the credit history and the deposit amount. In today’s world no one likes to be a defaulter purposely however no one can avoid the unforeseen circumstances. There are two types of defaulters in relation to credit cards: Non-wilful defaulters and wilful defaulters. In case of non-wilful defaulters, the borrower does not default intentionally and needs time to pay off his dues. His circumstances force him to default however in case of wilful defaulters the borrowers purposely does not pay the credit amount due on him.

CIBIL scores are linked to the credit cards. CIBIL scores are otherwise known as the credit score. It is a three digit number and is derived based on the CIR. In this context it is important to understand how the CIBIL score is advantageous and why it is essential to maintain a higher CIBIL score. In simple terms higher CIBIL score means more chances of getting a loan amount sanctioned to buy a property. In order to maintain a higher CIBIL score one has to maintain a strong portfolio and clear his dues regularly.

It is advised to use the credit card wisely. Usually one must use only 30%-40% of the credit limit each month which controls his expenses. There are many factors which influence the CIBIL score and it includes regular payment of credit card dues in time , one should not be very greedy while purchasing a credit card in case the bank is offering free credit card, do not be a spendthrift and use credit cards liberally and last but not the least secured loans helps in improving the CIBIL scores. It is inevitable that once the CIBIL scores degrade it is very difficult to repair the same.

Banks are very strict towards CIBIL scores. The risk involved is bank measure their wilful and non-wilful defaulters in the same scale. Both of them are treated like criminals. There is no provision for non-wilful defaulters to upgrade their CIBIL scores which is unjust. It is very easy to spoil the CIBIL score however it takes years to build it up. The bank and the individual both are responsible to build the CIBIL score. Banks can show leniency to a handful of customers and customers on the other hand need to prove their credit worthiness by paying off dues regularly. Hence secured credit is a favourable option as it is backed by a deposit amount and is helpful in increasing the CIBIL score. It is similar to purchasing some land against a mortgage.

A secured credit card has the advantage over the unsecured credit card in that it is a winning situation for both the parties: the bank and the individual. The bank earns dual income in the form of interest from the deposit amount and the income and charges from the credit card. It is a two way income for the bank. On the other hand the individual gets benefit in the form of higher CIBIL score which can be used to get a loan amount sanctioned to purchase a property. It is important to understand a point that a secured credit card is synonymous to a debit card because just like a debit card, the individual can spend up to a specified balance which will be available against the deposit amount in the bank. Hence secured loans are a blessing in disguise.