"I have a credit score of 785 but I am still having difficulty in getting a home loan, " expressed a concerned participant on one of my television shows.
On further questioning, he informed, "The lenders tell me that it's due to an issue with one of my credit cards in 2008 which I paid up fully in the last quarter of 2009 though the payment was admittedly late by around 14 months. I have several other loan accounts which have always been and continue to be up to date and my credit score is good (785 out of a possible maximum of 900). I have sufficient income and there are no other issues in getting the home loan. Can you tell me what I can possibly do to solve the problem?"
The answer unfortunately is that the participant will probably have to move to second rung lenders who may charge a little higher interest rate. To understand this answer let's do a quick recap on what is a credit score and how is it used by lenders. Now most readers are aware that Credit Information Company of India (CIBIL) collects your repayment data from various lenders and this data is available in a collated format to any prospective lender. This is extremely valuable to a prospective lender since he gets data from an objective third party source which provides your repayment history across all your loans/credit cards with lenders across the market. It lets him know about your current outstanding loan amounts and your repayment history as well as the enquiries made by various parties for your credit information report. Lenders can use all this data for taking a decision on your request for credit.
CIBIL can also provide a credit score (maximum 900) that gives a numerical value to denote the chances that the consumer will default on a loan. The higher the score, lesser are the chances that the consumer will default on the loan. The score is based on a proprietary advanced statistical analysis of past consumer data and defaults.
The banks pay a fixed sum of money for each credit information report that they access and also need to pay more if they also want to get the credit score. In cases where the banks do ask for the credit score (and not all banks ask for it since it costs extra money) they mainly use it to eliminate cases which have a credit score below a cut-off number (normally around 750). But they do not otherwise take the score into account for giving preferential treatment to customers with higher scores. This is probably because the lenders are yet to be convinced that a higher score automatically translates into a lower risk of default and it is natural as the credit score is relatively new and unproven concept.
This is the reason for the perplexed viewer's predicament mentioned at the start of this column. Whilst lenders would process his application as the credit score was satisfactory they would still look in great detail at his credit history and the single default on credit card was sufficient reason for them to decline his application even though it was some time ago and was paid off fully without any settlement. His best bet would be to go to a second rung lender who might not be completely hamstrung by centrally laid down procedures and be willing to spend the time on his file to understand that the single instance of default (which also was fully paid off eventually) should not be held against him.
I can add that the lenders are perhaps not totally wrong in still not putting in complete trust on the credit score. My personal experience proves the point that the credit score as a concept still has to mature. Now my own credit score is around 825 as I have taken great pains to have a spotless repayment record. I was shocked when my 25 year old son's credit score was way higher at 840 despite the fact that he had only 2 relatively recent credit card accounts and both were fully secured by fixed deposit and had low credit limits. I tried to get an answer from CIBIL about what I think is perhaps a faulty scoring logic but could not get a response. Credit score as a positive concept will take some time to take off as the analytics used to determine the score becomes smarter and smarter.
Meanwhile, make sure you pay all your bills on time if you want to get access to the best rates on loans or credit cards.