All of us go through financial crises some time. And during such periods we may have delayed certain loan payments or credit card bills. Well, if this has happened to you, there is a lot of bad news in store.

The Credit Information Bureau of India, CIBIL, in association with Dun & Bradstreet and TransUnion, has announced the development of a credit scoring system. The credit scoring system will use your past credit history and classify you as a risky borrower or a safe borrower. This score will be used by lenders (banks and NBFCs) to decide whether you would be eligible for a loan. If you have a bad credit history, you may not be eligible for any more loan, irrespective of your current financial stability. And well, your dream of buying your dream car or dream home may remain at that - a dream.

So, how does CIBIL’s credit scoring system work?
The generic credit score has a range of 300-900 points. If a borrower has a score of 300 then he/she will be considered as a risky borrower. A borrower having a credit score of 300 will be considered the risky while a borrower with a credit score of 900 will be considered the safest.

Does this credit scoring system apply for all kinds of lending?
The product is a generic one and is valid and applicable across all products and for all lenders. The CIBIL credit score was launched on November 27 and already lenders are using it to check the credit profile of potential borrowers. I know a friend who was not eligible for a car loan from SBI, UTI or ICICI, just because he had defaulted on one EMI payment in the past.

What are the different parameters that are used to obtain the CIBIL credit score?
The generic credit score is developed by taking five parameters into consideration:

1. Credit utilisation - Say you have a credit card limit of Rs. 50,000 and you use up most of the limit each month, it indicates that you are a spendthrift. And your credit score would be low. Thus, you must utilise your credit limit optimally if you want a good credit score.
2. Frequency of defaults by borrowers - If you often default on your home loan or personal loan EMIs or often miss your credit card due date then this also leads to a bad credit score.
3. Frequency of loan enquiries made to a number of financial institutions - Enquire for a loan only when you seriously intend to take it up. If you go to too many banks/loan institutions asking for a loan, it creates an impression that you are not a serious borrower. And it may be indicative of you taking a loan from multiple sources together.
4. Attributes of the trade, like, the age of the credit history - If you have been using a credit card for two years and have never been late on your outstanding then it stands you in good stead and vice versa. Also, a more recent deafult on your payment would have a greater adverse impact on your credit score.
5. The product mix of your borrowings - You should not hold a portfolio of loans at the same time or should not have borrowed too often if you wish to avoid being termed as a bad borrower.

How does CIBIL get this information?
CIBIL collects commercial and consumer credit-related data and collates such data to create and distribute credit reports to Members. It primarily gets information from its Members (Banks, Housing Finance Companies, Non-Banking Finance Companies and other lenders where you apply for a loan or make enquiries for a number of financial products) only and at a subsequent stage will supplement it with public domain information in order to create a truly comprehensive snapshot of an entity’s financial track record.