A commercial on TV shows a person waving his CIBIL Reports and the lenders flock to him to give him a loan; he is treated well, with a lot of respect and of course his loan is sanctioned. So what does the CIBIL Score actually say about a person's financial profile that opens doors of banks for him; what all do those three digits tell?
Apart from lenders, employers when hiring people for higher management positions and looking for individuals to work in financial sectors can also ask for an applicant's CIBIL score. This trend is still at a nascent stage in India. In USA, which is heavily credit driven, it is common for utility providers, insurers to ask for a credit report; even when looking for an apartment or a life partner the credit score comes into play! So have you ever wondered what does the CIBIL Score say about me?
The most important fact revealed by the credit score is the financial health of an individual. Credit score is calculated based on a lot of information collected from various sources across a considerable time period. It's not just recent behaviour or one off random action that is reflected in the credit behaviour.
A lot of variables and factors contribute to the final score; repayment behaviour for all types of credit dating back years, type of debt, credit utilisation, loan tenure etc are all considered when calculating the CIBIL score. Thus these three digits give a concise picture of your financial health and behaviour; any randomness is taken care of by the numerous variables and also the time period over which the data is spread.
In case one or two credit card payments are missed over a five year period then it can attributed to genuine reasons and they will not have an overall adverse impact on the credit score. However if credit card payments are missed every few months then they reflect on the poor financial health of the person. It is clear indicator that the person is in the risk of falling into a debt trap.
A low credit score means a high risk profile and a high CIBIL score means a low risk profile.
A financial institution when lending money does it with an understanding that it will get the money (principal and interest) back and ideally get it back on time. This they judge by looking at the CIBIL score which is an indicator of the risk profile of an applicant.
A high risk profile indicates that the chance of the customer defaulting or delaying payments is substantial; the lender may choose to reject such an application or charge a higher interest if sanctioning a loan.
Apart from the financial habits of a person the CIBIL score can also reveal a few traits about an individual's personality. This is maybe one of the reason employers may want to have a look at it apart from the potential hazards (litigation, fraud) of hiring a person who is debt ridden or in poor financial health.
a. Planning and organisation
A CIBIL score indicates whether a person is organised and plans ahead or not. Financial health is a result of good financial planning and organisation too. Not planning your finances, taking a car loan without figuring out whether you can pay the EMIs or not; not being organised enough to check about a bank's policies for sanctioning a loan and randomly applying to it are few actions that affect your CIBIL Score.
Careful planning ahead ensures that you are in a position to meet your financial obligations monthly and loan applications (which result in hard credit enquiries) are not rejected.
Paying EMIs or credit card bills on time is the simplest thing to do in case you have planned your finances well. However not paying on time frequently is a sure indicator of lack of discipline; you are simply forgetful or not disciplined enough to follow the plan. Similarly swiping the credit card without bothering about the payment that needs to be made at the end of the month also reflects lack of restraint and discipline. All organisation and planning can go for a toss if one is not disciplined enough to follow it through.
Defaulting on loans or credit card payments can also reflect lack of integrity in the person sometimes. It may be the case that the person does not simply intend to pay; s/he does not have the integrity to honor her/his commitment. There are enough cases of wilful defaults especially on credit card payments and personal loans simply because the bank has nothing the repossess.
The CIBIL score is an indicator of a person's financial robustness, it is indicative of behavioural pattern to some extent and also tells about the risk potential the individual poses.
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.