Why clean credit history is so very important for you

Most of us pay Equated Monthly Installments (EMIs) for either credit cards or for our various loans. In an interview to CNBC-TV18, Pankaj Mathpal of Optima Money Managers gives in detail all the DOs and DON'Ts when applying for loans.

Also read: What happens when you default on a loan? Below is the edited transcript of Mathpal's interview.  Q: A lot of people delay paying their Equated Monthly Installments (EMI) for credit cards, for other loans as well as mobile payments. Apart from interest cost, can there be cost in terms of reputation and credit history, now that credit history is being collected?
A: A credit information report is one of the most important reports for any loan provider to revaluate your application. So basically, if you are delaying your payment or not making your payment in time, that will be reported to the Credit Information Company. All the banks and other financial institutions like non-bank financial companies (NBFCs) or home finance companies are members of one or more credit information company who share information with the CIC on a monthly basis. So, delay in making payments will be reported to these credit information companies and when you apply for loan later, that will be evaluated and it will be considered negatively.
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Q: When I shop on my credit card, I often pay the minimum EMI required instead of repaying the entire amount. Does this affect my credit history in any way?
A: If you are not making full payment and paying only a part of your EMI, it shows that you have poor repaying capacity. It means that whenever you apply for a loan, it will be considered that you are not able to pay your full amount. If you don’t pay full amount month after month, it will keep on increasing and with a large outstanding, it will have a negative impact on your credit history.
If your credit limit is Rs 1 lakh and you have exhausted Rs 90,000 of that on a credit card, it shows that you are credit hungry. That has a negative impact on your credit card. So you should always have a mix of loans.
If you have a home loan, a car loan or a personal loan and you are paying within time, that shows that you have credit worthiness. However, if you have a large outstanding on a credit card which is an unsecured loan, this shows that you are a credit hungry person or maybe there is some other reason that you have not been able to get other loan sanctioned.
Also, it is not only the loan outstanding. Sometimes, if you are enquiring with multiple banks whether a loan has been availed or not, these banks will inquire with credit information companies like Credit Information Bureau India Limited (Cibil) or Equifax. In such a case, that will also reflect that the person who is enquiring with multiple banks is credit hungry. So all these things will bring your score down and whenever you apply for the loan, it will have a negative impact on that. You should pay your EMIs, your outstanding within due date.
If your sanction credit is higher but you are using a limited part of that, it shows that you have credit worthiness and that is a good thing.
Also, don’t go for settlement of your credit card or waiver of your credit because that also shows that you are not able to pay your credit outstanding that is why it was settled. So, having credit sanction and not using the full amount of that shows your credit worthiness. Q: If I make enquiries with several banks why should it be held against me? After all shopping for the best possible loan and loan conditions is my right as a consumer? Banks are practically always making mistakes with respect to credit history, so how do you rectify them?
A: It is your right to enquire with multiple banks. Just to check interest rate also or negotiate, you can check with multiple banks. However, in general, these banks consider your enquiry with multiple banks and these banks are enquiring with Credit Information Company. It means that one bank did not sanction the loan and that maybe the reason for you to enquire with the other bank. So it is considered. It is not the only reason for approving or rejecting a loan, but it is considered that the person has a credit hungry behaviour.
Mistakes in the records happen many times, but in that case, what the individual should do from time to time is ask for a credit report from the Credit information company. If they find some mistakes, they should approach either the credit information company or their loan guarantor directly, because CIBIL or other credit information companies cannot make changes.
Changes will be made by the bank itself. In that case, if they are writing to the credit information company, they may take up the matter with the banks and get it rectified. So, it is a good idea to ask for report from this credit information company so that you can rectify something if required.