Cheaper loans based on you credit history would soon be the reality Culture of 'credit' is spreading fast. People buy smartphones on EMIs and pay even hotel bills by credit cards these days. But not all of you are alike. Few of you must be applying for loans only occasionally and may be even pre-paying them. As you may be aware, all this gets counted in your credit score. But as of now, despite of having good credit scores you don't have much of a bargaining power with banks for availing cheaper loans. This may change very soon.

Here's why...

Today, barring few large banks, most of the other banks are using flat loan pricing model wherein good credit behaviour is not incentivised and bad one is not penalised. In India, credit scores have so far been used only to determine whether to accept or decline the credit application of the borrower. Lately, RBI addressed this issue and has specifically suggested banks to use credit scores even to price loans optimally. If banks start following this practice widely, bargaining with banks for cheaper loans might soon become reality for large number of borrowers.

How banks would assess your application?

Although your credit score might be the basis for banks to take a call on your request for cheaper loan; banks may consider some other factors as well. Factors such as income and occupation may be helpful to banks in determining the level of risk they might be exposed to. Furthermore, in case you hold a saving bank account with the same bank; it may try to analyse your saving account history. When combined all these aspects, banks may get fair idea about your financial behaviour.

Some tips for improving your credit score and financial behavior

Credit Information Bureau (India) Limited (CIBIL), an independent credit information agency takes into consideration several factors to assign you credit scores which include;
 

• Payment history
• Credit usage
• Duration of the account
• Type of loans (consumer loans, home loans etc.)
• Number of enquiries to avail credit
   

Based on factors given above, final score ranging between 300 and 900 is assigned to you. Higher the score lower is the risk involved in giving you credit. Usually the score of 750 and above is considered very healthy.

You may improve your credit score by;
 

• Paying your EMIs on all kinds of loans and credit card bills on time
• Pre-paying loans as and when possible
• Not opting for multiple credit cards
• Using credit cards in moderation
• Maintaining healthy mix of loans (for example, home loan, auto loan and a couple of credit cards)
   

Borrowers having a credit history of less than 6 months used to earlier get a credit score of '0' owing to shorter credit history. But CIBIL TransUnion Score 2.0 which is the newer version of the credit score; grades even the new borrowers on the scale of 1 to 5. Grade of 5 denotes lowest risk and vice-a-versa. Borrowers with the credit history of more than 6 months get a score in the range of 300-900.

PersonalFN believes, under the current system, banks which have been following flat-rate pricing models are losing customers with high credit quality to larger banks due to absence of differential pricing. They are ending up accumulating more low quality customers. On the other hand, borrowers with good financial behaviour are not getting benefited. PersonalFN is of the view that switching to risk based pricing from flat-rate pricing model is a win-win situation to both, banks as well as the borrowers. Borrowers with good financial behaviour would be able to avail loans at cheaper rates while banks would be able to attract good quality customers and thus tackle the problem of bad loans effectively. Maintaining your credit scores high would be of help. Personalised financial plan lays foundation for financial prudence.

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