Credit Score and Its Consequences

 

We often hear unsettling stories of business owners suddenly discovering from their bankers that their personal or business credit score (CIBIL score) is alarmingly low, with numerous overdue amounts they were unaware of. Consequently, not only does their application for a new loan become jeopardized, but existing loans also come under scrutiny from lenders, leading to tough times until these issues are resolved.

Doesn’t this sound familiar - perhaps a personal experience or that of a close friend or relative?

It’s crucial to understand that when borrowing money for business or personal purposes (such as using a credit card), timely payment of all bills by the due date is essential to maintain a good credit score. Being even slightly lax or paying bills after the due date severely impacts your credit score, triggering a cascade effect on all borrowings and prompting lenders to pose numerous questions and follow-ups, making life difficult.

Credit Bureaus and Scores

In India, credit scores are reported by credit bureaus like TransUnion CIBIL, Experian, Equifax, and CRIF High Mark, operating under RBI guidelines. These bureaus compile credit scores and reports based on an individual’s or firm’s credit history, account conduct, payment behavior, and borrowing patterns. Banks and financial institutions access these scores and reports to evaluate loan applications and renewals.

Typically, credit scores range up to 900, with 750 and above considered good. Scores between 700-750 are average, while those between 600-700 are slightly below average. Scores below 600 can lead to significant challenges.

To obtain your CIBIL score report, you can approach lenders or personally download it from the CIBIL website, opting for either a free basic report or a detailed paid version. Once obtained, review the report for any overdue items and address them promptly.

Often, discrepancies arise not due to your actions but incorrect reporting. In such cases, you must diligently follow up, submitting necessary complaints and supporting documents to rectify your records. Updates may take time, reflecting in subsequent cycles.

Key Terminology

Understanding SMA and NPA is crucial in this context, along with associated terms:

Overdue: When a borrower delays payment of obligations (principal and/or interest) to banks, even by a day, it’s termed as overdue. The delay is quantified by the number of days.

SMA (Special Mention Account): This term categorizes accounts with overdue payments into three sub-sections:

  • SMA 0: Overdue up to 30 days.
  • SMA 1: Overdue between 30-60 days.
  • SMA 2: Overdue between 60-90 days.

When an account enters SMA status, banks are mandated to report this delinquency to CIBIL on the same day of default, adversely affecting the credit score.

NPA (Non-Performing Asset): If overdue payments exceed 90 days, the account is classified as an NPA. Banks must provision for such receivables or write them off. Being labeled an NPA severely impacts one’s current and future business prospects, complicating future loan approvals.

Best Practices for a Good Credit Score

Given the critical importance of maintaining a good credit score, adopting these best practices is essential:

  • Pay credit card bills at least 3-5 days before the due date, allowing time for processing.
  • Ensure timely payment of interest and principal on term loans and credit cards, avoiding any overdue payments.
  • Maintain discipline in financial dealings to minimize the risk of facing challenges encountered by others.

By adhering to these practices, you can safeguard your credit score and avoid unnecessary hassles in financial matters. We at Bankkeeping can help you with your banking needs. To know more you can read our case studies and refer testimonials.

https://www.bankkeeping.com/about-us, https://www.bankkeeping.com/#introduction, https://www.bankkeeping.com/#services, https://www.bankkeeping.com/#calc, https://www.bankkeeping.com/#reviews, https://www.bankkeeping.com/faq, https://www.bankkeeping.com/blogs, https://www.bankkeeping.com/case-study, https://www.bankkeeping.com/contact-us, https://www.linkedin.com/company/bankkeeping/

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