Rajlakashmi was a conscious person. She has always ensured that she was paying the credit card dues on or before the due date without any exception. Hailing from a middle class family that believed in living within the means, Rajlakashmi was averse to credit. Even after getting a good paying job she only took a credit card and had never ventured to apply for any other loan. But now that she was in urgent need of funds to take care of her own marriage expenses, she applied for a personal loan. To her surprise the same got declined. Her dreams of getting a little extravagant on marriage shattered.
What could have gone wrong? Rajlakashmi had a fairly paying job and had also displayed maturity to manage credit. She never missed her payments and still here she was being handed over with a rejection letter. Let us evaluate the reasons that potentially would have led her into this difficult situation.
To begin with availability of credit is subject to one’s credit health. The same is determined by factors explained below.
Fear on unknown
If I was to ask you to lend money to a stranger, your answer would be a definite no. You would want to extend financial help only to people who are known to you and you feel confident of getting back the money from them. Now even the lenders want to lend to the set of people who they feel confident about not going delinquent. Just like you would know the background of people who you may extend a small loan the bank also checks on the bureau in the process of underwriting. The credit bureau extends each and every detail on the past performance of the borrower across all loans taken. In case of Rajlakashmi, the bureau report did not display much on her ability to handle loans since the exposure was limited to only one credit card.
Past is linked to future
The Credit Score, commonly known as CIBIL score calculation in India, is the three digit numerical expression of one’s past performance and possibility of one going delinquent over 12 to 24 months. In case of Rajlakashmi, the past performance since only factored one credit card and that too for just about a year’s history, the credit score was low.
Length of credit and variety of credit accounts manage form an important part of the algorithms deployed by the bureaus. And unfortunately, she failed on both these parameters.
The total credit available and the way one uses it also forms an important part of the decision engine deployed by the banks. In case of Rajlakashmi, since she was to get married soon, she maxed out on the credit card limit. While in the earlier months she was paying back in full, as the marriage date got decided, she started to inch closer to complete utilization of limit and was at this point of time maxing out. From a lender’s perspective, this is not a good sign. A person with a history of only credit cards issued within a year, with the utilization almost to the available limit, has the possibility of getting construed as a sign of financial stress. Even the bureau score will reflect it as stressed through a low ranking. This is what happened with Rajlakashmi as well.
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