Aug 12 2008
Credit Reports Basics
As the industrial activity has been increasing over a period to time and disposable income at the hands of individuals is also rising so there has been increase in credit offtake or in other words we say money supply in the market. Banks / NBFCs have been aggressively lending both to the industry as well as individuals for their various needs like business loans, commercial loans, consumer loans etc. However, this aggressive lending has resulted into deterioration in the asset quality portfolio of the organization over a period of time which is evident from the recent sub prime crises. Most of the big investment banks have suffered huge losses due to this. So one wonders what essentially went wrong? It was just that the loans were made available to the borrowers whose default chances were higher than the average in return of a higher interest earnings.
As soon as there was a slow down in the economy, the income levels reduced which resulted into defaults in repayment of mortgage loans. Now how is it that the banks could have avoided this situation? One mitigant would have been availability of credit report of the borrower. Credit reports have emerged as one of the most important tools of assessing the quality of the borrower. Credit report can of an individual or an entity also. There are many agencies (Credit rating agencies) which are into making of credit reports. For entities, another terminology is used which is known as credit rating. Credit rating agencies do an unbiased and objective credit rating of the borrower which helps the lender in decision making.
Credit reports reflect the borrower’s past track record in terms of financial discipline, expected capability and intention to repay the debt. Credit reports help the lender to differentiate credit quality amongst different borrowers and identify what are the risk involved. However, one point to be noted is that a positive credit report does not necessarily means that lender should grant loan to the borrowers although a positive credit report helps the lender to decide rationally about the lending decision. Further opinion in the credit reports is not to be used for long term purposes, credit reports need to be updated on regular basis.
In developed countries almost all the data is available on real time basis so it is necessary that one should always make sure that the EMIs of the various consumer loans such as auto loan, mortgage loan, education loan, personal loan etc are paid on time so as to avoid any reporting of delayed payment. Similarly dues of credit card should also be paid on time. Credit report is nothing but a past conduct of your repayments. If the same has been on time, then certainly it will help you to score better in the credit report and a better credit report will make you eligible for a higher amount of loan. So our advice is the be careful about repayments.