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Credit watch: Mohan Jayaraman

Business Standard 

My wife and I are jointly applying for a home loan. But I had missed a few monthly instalments on a personal loan four years ago. I paid it off subsequently. My wife has never taken a loan. Will my chances of getting a home be impacted due to the default?
It is great to know that you have a responsible credit behaviour. Missed payments impact your credit history and most lenders will certainly look at it as an important parameter to determine the risk on a prospective borrower. Lenders, however, consider recency of missed payments. As an example, a default that occurred a couple of years ago will not have the same impact as a default a year ago. As a result, though the missed payments could have some impact on your credit rating, it should not prevent you from availing a new loan if your payment behaviour subsequently has been regular across the loans and credit cards you hold.

Banks, often, use credit score to reject customers. What is a decent credit score? Is the cut-off the same for all credit bureaus?
A credit information report from a credit bureau contains identity information, past and present credit obligations (including the ones for which you have joint liability) and previous addresses and enquiries made by banks for all your loan applications. If your report shows you repay credit on time, it will help the credit institution in the decisioning process. The information in the credit information report is summarised by the credit information company in a bureau score.

A credit score indicates the borrower’s credit worthiness and lenders are increasingly relying on credit scores, as a part of the credit approval process. Usually, the higher your score, the better your creditworthiness and the more the chances of your application getting approved.

Each bureau typically uses a separate scale for scores. Hence, a customer with a score of 800 might have a low-risk profile with one bureau but the same score may indicate a high-risk profile with another. The cut-offs for credit scores vary with bureaus and individual lenders will also customise cut-offs based on internal policies. Hence, it is difficult to comment on a single cut-off that can be considered as a decent score.

Apart from credit usage and credit history, what are the other things a credit score is based on?
Though credit usage and credit history are key to a credit score, credit enquires and demographic variables, like age, can be part of the scoring algorithms. It is widely observed that consumers are unaware of the impact of enquires when shopping for new credit. Too many enquiries might mean you’re taking on too much debt or that you’re in some financial trouble and looking for credit to help you out. So, when shopping around for a mortgage or a new auto loan, make sure the lender is not recording this as an enquiry and pulling up your credit report.

Today, Mohan Jayaraman, managing director of Experian Credit Information Company, answers your questions

First Published: Mon, December 10 2012. 00:49 IST