Relentless tele-callers bugging with loan or credit card requests and continuous mails from random firms promising you a free credit report are pretty much everyday occurrences for many of us. But a casual reply or a careless answer can affect your financial life. Here are a few real-life instances that highlight the importance of a credit report. After citing these cases, we get into what it means for you and explain a credit report’s nuts and bolts.
Mistakes people make
Case 1: We had a client, Mr Sharma, who approached us for advice. His credit report was a whopping 42 pages long. Upon going through it, we found that the last part that mentions the enquiries made by him ran to nine pages! These are the enquiries made by a lender each time you agree to apply for a new loan product. Please remember, whether you subsequently take the loan or not, or if the loan itself get approved/rejected, the request is mentioned as an enquiry. Mr Sharma told us he never likes to say no to anyone, so each time a tele-caller asked if he is looking for a loan, he said yes! Do not say yes at the drop of a hat. Apply for loans only when you need them; unnecessary loan enquiries work against you.
Case 2: Akshay sent a frantic mail saying he was on the verge of having a nervous breakdown and we had to talk to him right away. Once he calmed down on the phone, we found that he couldn't deal with 'rejections' in life. After his second month in an IT company, he had applied for a Rs 4 lakh personal loan to buy goodies for his parents back home and the bank had 'rejected' his personal loan! Mind you, this was the first 'rejection' he had ever faced in his life. Please understand the bank needs to know what kind of a borrower you are before it lends to you. You can't go shopping for a loan the minute you think you are eligible.
Case 3: Anusha was fed up of multiple calls offering loans, cards and discounts. She later found out that when she had applied for a 'Free Credit Report,' her data was out there for every second lender in the market to offer her some loans. Please be careful where, how and with whom you share data. Too many online vendors exist out there, so please be watchful, and read between the lines. Our data protection laws are not too robust and we will be forced to run from pillar to post to prove our innocence if something were to go wrong.
We have been overfed with mails or calls on 'check your credit report', 'free credit report', check here, check there and everywhere. Most people have no idea what a credit report is and click on a particular link only because it says “free report!”
What is a credit report?
In simple terms, a credit report is a statement with details about your credit activity, loan paying history and the current status of your credit accounts. The report does not talk about your income or savings or insurance.
A credit report is all about your credit, what you owe, how much you have borrowed etc.
Loans that you had taken in the past, repaid and closed, or defaulted are all enlisted. The same happens with credit cards as well. All the loan accounts have a start date, which is the date when they were opened. The older the credit history, the better the report Why? Because the lender has a history to go back to.
There is a common misconception that accounts are mentioned in the credit report for only seven years, after which they get deleted automatically. A credit report is used by your lender to decide on your loan, at what interest rate, and for how long (tenure). Apart from your ability to repay, the rest is known from your credit report.
A credit report tells your lender
-what kind of a borrower you have been
-if you are new to borrowing
-if you are an existing borrower, the kind of loans you have taken
-frequency of your loan requests
-the kind of lenders you have borrowed from (based on the interest rates you are repaying)
Hence, it does not make any sense to delete an account after seven years isn't it? If you have been a good borrower, it works against you as there is no history to substantiate your responsible behavior. A credit report is a very valuable document which can make or break your chances of availing a loan.
Use a credit report responsibly, know your rights and responsibilities, and move forward by becoming 'credit wise'.
(The writer is founder-Director, rectifycredit.com)