We often come across nasty stories of how suddenly one day the business owner came to know through his Banker, that his personal / business firm’s Credit Score(CIBIL score) is very poor and there are a lot of overdue amounts and the owner is clueless about these. Consequently, his application for fresh loan not only jeopardizes but also all his existing loans also do come under the scanner of lenders and he has to face tough times, until all these issues are resolved. 

Isn’t this a common story - maybe of self, or a close friend or relatives? - Right.

Well, it is extremely important to know and understand that when we borrow money for business purposes or even for personal reasons (say even using a Credit Card),the timely payment of all the bills within the due date is crucial to maintain a good credit score. If we are a little casual / relaxed or pay these bills after a certain number of days (beyond the due date), then our credit score gets severely impacted. This, in turn, has a cascading effect on all our borrowings and the lenders make our life miserable with so many questions and follow ups. 

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Credit Bureaus and Scores

In India, the reporting of such credit scores is done by credit bureaus - like TransUnion CIBIL, Experian, Equifax, and CRIF High Mark, which operate under the guidelines of RBI. These bureaus compile credit scores and reports based on an individual’s / firms’ credit history, conduct of account, payment behavior, and borrowing patterns. Banks & Financial Institutions have access to such credit scores and the associated reports to evaluate before they sanction any fresh loan / renew an existing one. 

Normally,the credit score given to us is out of 900.  Any score of 750 and above is considered good. Score between 700-750 is average; and the slab between 600-700 is little less than average. In case, the score goes below 600, then you shall have to face a tough time for sure. 

So, one needs to get their CIBIL score report - either through lenders or can personally download their report from CIBIL website (https://www.cibil.com/) - wherein they have the option of Free Report (basic) as well as a paid version (detailed). Once you have there port, one needs to check & review the overdue items and get them cleared (if any). 

Many times, the fault is not at your end - rather, the reporting has been incorrect.Even in such a situation, it is you who have to run from post to pillar and make necessary complains along with requisite supporting and get your name cleared. The update will still take some time and will be visible in the next cycle, after a certain number of days. There are some specialised agencies who provide these services, but it is always advisable to go through a proper reference. 

Important Terminologies

It is pertinent to understand the significance of the concept of SMA and NPA in this context along with its other associated terminologies.

Overdue:

Whenever a borrower delays the payment of its obligations (principal and / or interest)to the Banks, even if it is for one day - the same is called overdue. So, we calculate overdue with the number of days. 

Example- Say, if there is a delay of 10 days in servicing the interest, then it shall be called as 10 days overdue. 

SMA:

SMA stands for Special Mention Account - implying that any account which is overdue will fall under the ambit of SMA. This is further classified into 3 sub-sections: 

SMA 0 - signifies if the account is overdue upto 30 days (basically (1-30 days)

SMA 1 - for accounts which are overdue between 30-60 days (30 days to 60 days)

SMA 2 - in case the account is overdue between 60-90 days (60 days to 90 days)

So, as and when your account gets the tag of SMA (whether 0 or 1 or 2) - it is mandatory for the bank to report this delinquency to CIBIL on the same day of default (basically, the day on which this account gets the respective status).Consequently, the credit score starts getting negatively impacted because of such reporting. 

Even the Bankers take this seriously when the account gets into the SMA league. While itis SMA 0, they shall start nudging you to get it cleared and the intensity keeps increasing as & when you move into the SMA 1 or SMA 2 category. 

NPA:  

NPA stands for Non-Performing Asset. Once the overdue crosses 90 days, the account is classified as NPA (or bad). The Bank is mandatorily supposed to provide provision for this receivable or it may even write off, as the case may be.Once a borrower becomes an NPA - his life and business suffers very adversely.Not just the present business, whatever business he / she may undertake in future, that also gets severely impacted, He/she shall have a very tough time in raising a bank loan for his new business in future, in case needed. 

Delinquency is reported to CIBIL on the date of default (account turning into SMA) as stated above and credit score is impacted adversely. 

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Best Practices to Ensure Good Credit Score

Hence, after realising how important it is to maintain a good credit score, let us understand what all we can do to ensure that we do it successfully. These are some of the best practices which we can adopt in relation to the same. 

• Pay your official or personal credit card bills at least 3-5 days before the actual due date since the payment also takes about 2-3 working days to get reflected in     your accounts. 
• Ensure that all the interest (be it for CC or Term Loan) are paid positively on the respective due date and there are no overdue at any point of time
• Kindly monitor that not just interest, even the principal is timely paid on their respective due date. Basically, there should not be a single day delay in your EMI / other instalment obligations. 

The idea is simple - to maintain a proper discipline in handling your banking & financial matters, so that you don’t have to face the hassle like others, at times. To Improve your credit score, Book a free Demo of BankKeeping.