If you apply for a loan from a bank or financial institution and it gets rejected, it might be because of your bad credit history and poor credit score. Every loan that a bank or a lending institution doles out to a customer?be it home loan, car loan, personal loan and even credit cards?there is an element of risk involved in it, the risk of default. As the number of people seeking credit is increasing, banks and other lending institutions have become extra cautious in sanctioning loan. And one of the significant parameters banks and lending institutions apply to evaluate the risk profile of the borrower is to assess his past credit behavior reflected in his credit history from a credit information company, also called a credit bureau.     

Credit Information Bureau of India Ltd or Cibil is the first among the four credit information companies in India. The other three being Equifax Credit Information Services Private Ltd, Experian Credit Information Company of India Private Ltd and High Mark Credit Information Services Private Limited.

A bank or lending institution has to report all credit information of a consumer to at least one of the four credit bureaus. No matter how much is your take-home salary, your credit history is one of the most important determinants of whether you are eligible for loan or not. A clean credit history and a good credit score reflect the good creditworthiness of an individual. This means the person has a higher change of getting loan from a bank or financial institution. But the question is: how to keep a good credit history and improve your credit score, if you’ve ever defaulted on your loan?

Be in control of your finances

If you’re financially disciplined your credit history would be good and you could improve your credit score. “For maintaining a good history and, subsequently, a worthy credit score, you should ensure that you are always in control of your finances. Remember, a good credit history results in speedier access to credit. It is beneficial to both credit grantor as well as the credit borrower.
However, if your credit score is low, don’t be disheartened. The credit system always gives scope for improvement. You can start improving your credit score by simply paying off your debt and not opting for more credit until your score improves,” says Harshala Chandorkar, Senior Vice President (Consumer Relations & Communications), Cibil.

Adds Siddharth Das, COO, High Mark Credit Information Services, Mumbai, “A good credit history is an outcome of disciplined fiscal behavior. Borrow only when needed and borrow only as much as you can afford to repay. In addition, a borrower must make sure that s/he has enough funds left over after paying EMIs to avoid unexpected liquidity crunch.”

But does it mean if a credit card user misses out payment on his bills or an EMI on his loan payments even once, it would impact his credit score? It depends on the frequency of the default, say experts.

“Delayed payments impact the credit score. It is always better to make all your payments on time. However, if you miss a payment only once by only a couple of days, it will not significantly impact the score. But if the delays become more frequent, it may significantly affect the score. It is, therefore, important to keep up your commitments as per schedule,” says Mohan Jayaraman, Managing Director, Experian Credit Information Company.

Adds Das of High Mark Credit Information Services, “The degree of impact depends of how frequently you make late payments or miss payments altogether.”

Balance your credit portfolio

Your credit history and score also depends a lot on what type of loan you’ve taken and whether they are balanced enough. “Your credit history should contain a mix of secured loans (home loan, auto loan) and unsecured loans (personal loan, credit cards). A high number of unsecured loans may affect the chances of a loan approval,” says Chandorkar of Cibil.

Secondly, even if you haven’t gone overboard with regard to using your credit cards, the way you use the plastic money also has a say in your credit history.
For instance, as she says, if you have used Rs 90,000 out of a credit limit of Rs 1,00,000, this may be viewed negatively by a lender. It’s always prudent to not use too much credit.

Further, if you haven’t used your credit cards at all, that’s a good piece of news for you as it is a good sign of your financial discipline.

“While using credit cards may negatively impact your credit history, unused credit cards actually imply that you are financially secure. This makes lenders view your application more favorably,” says Chandorkar.

Review your credit history

If you want to avoid any loan rejection in future, officials advise you should review credit information report periodically to check if the data in your credit history are accurate.

Unpleasant surprises in the form of rejected loan applications can be avoided by, ensuring that an individual’s credit information report accurately reflects their current financial status. Therefore, reviewing one’s credit history and score three to four times each year is imperative.

“Check your credit information report regularly. It always makes sense to get a copy of your credit information report before you apply for credit or if you are refused credit as a result of information held by a credit information company,” says Jayaraman.

Another important point is to review your joint bank accounts at regular intervals. In co-signed or jointly held accounts, both are held equally liable for missed payments and, therefore, your joint holder’s negligence could affect your ability to access credit when you need it, say experts. 

If in distress, contact your lender

If you know you won’t be able to settle your EMI payment next month because of financial problems, don’t hesitate to discuss it with your bank to find out a solution. “If for any reason you are going to be late, it is advisable to immediately contact your lender and make mutually acceptable alternate arrangements for repayment that a lender might be able to accommodate. Such accommodations might vary from repayment moratorium, to credit restructuring,” says Das of High Mark Credit Information Services.

Jayaraman of Experian Credit Information Company adds, “Always make payments on time. If you cannot do this, contact the lender as soon as possible to discuss what options are available to you, it is always better to speak to your lender immediately if you are experiencing any difficulties in maintaining your payments.”

Further, be in touch with your bank or the concerned credit information company, even if you notice any discrepancy in your credit report. For instance, in case of Cibil, one can get the mistake rectified with the help of Cibil Dispute Resolution department by visiting its website and entering details like your name, address, date of birth, report control number and the nature of the dispute. However, Cibil can only make changes to your credit information report, once the lending institutions submit the updated data. 

So next time you apply for loan, keep your finances straight before approaching a lender.