According to officials of credit rating agencies, if you have not applied for a loan for a few years, the rating agency does not have enough data on you and that means a negative score.
For example, the score given by CIBIL is calculated based on the credit history of the borrower over the past 24 months. "A minimum of six months of recent credit history is required for generating the CIBIL TransUnion Score on a borrower," says Harshala Chandorkar, senior vice-president, consumer relations.
So, if an individual has paid back and closed his loan or credit cards a few years back and does not have any credit cards or existing loans since then, he will not get a credit score. A value of '-1' will be put against his/her credit score which implies no history (NH) is available on the borrower for generating the credit score.
Do bankers take the rating of NH seriously? According to them, if you do not have a score or loan history, the bank would seek more information, making the process of loan-approval slower. Says a senior with a leading private bank: "While it gives a clean history, the absence of any information means more checks and balances. So, we ask such people to give us more references so that we can cross-check the person's background."
There are other traits that the agency will consider while giving your credit rating. Sudden usage of all credit cards when you have been using only one for a long time, high credit utilisation consistently and, of course, too many unsecured loans. "Having too many unsecured loans can be seen as risky behaviour, since it is an indication that there are too many contingencies in your life. This may make the lender question about your ability to repay on time,'' says Mohan Jayaraman, managing director, Experian Credit Information Company.
Consequently, if you are planning to go for a big loan, home or car, you really do not want these factors to come into play. It would be wise to clean your books and well in advance, say six months to one year. If you have too many personal loans, take one big loan and clear all the other dues. This applies for a large credit card due. Similarly, ensure instalments are paid on time and regularly.
Small things like dues of some fees due to bouncing of an earlier cheque needs to be cleared. The amounts might be small like Rs 500-750 but it hurts your loan-taking ability. For youngsters with little or no credit history, it would make more sense to have a parent as a co-applicant.