CREDIT SCORING SYSTEM: HOW CREDIT BUREAUS MAKE MONEY OFF YOUR FINANCIAL ISSUES AND HAUNT YOUR FUTURE

The credit bureaus and creditors do have one thing in common in regards to the reporting of your data. They both make more money the worse your credit is.

– Mafm W Lamar Foster (In his book The Credit Game: Learn the Rules of How to Play & Win)

Shocked and surprised? This, however, seems to be 100% true. It is often said that credit score plays a pivotal role in determining an individual’s financial health and access to credit. And rightly so, to some extent. Because if you want to take a home loan or a car loan, it is your credit score (popularly known as CIBIL score in India) which will determine your eligibility for the loan as well as its interest rates. Not only this, in some countries, it is now becoming increasingly difficult to marry someone or get certain jobs if your credit score is low. So, with a good credit score, you will be treated well everywhere and also get offered good rates – helping you to save a good amount of money in the long run.

If that is the case, who on earth won’t want to keep one’s credit profile as good as possible? It also looks easy. Take a loan or credit card, pay the EMIs on time, never default, and see your credit score rise!

However, is it that simple? That is a big question. If this game were that simple, then how would the stakeholders (credit bureaus and lenders) be able to play the game and make money?

On the one hand, the credit scores of crores of people get ruined based on the reports of other institutions, and on the other hand, access to credit is simply denied or higher rates are charged in the name of low scores. However, it is difficult to understand why someone should be forced to pay abnormally higher rates compared to others, say, on their home loan if they have never delayed any EMI payment ever since they took a loan about 15 years back, for example. Their only indiscretion was failing to clear a small outstanding demand of, say, Rs 1,000 or Rs 5,000, ten years ago, assuming it had been cleared.

Also Read: How much cash can you legally keep at home in India?

Creditors and credit bureaus have enough time to report and collect crores of individuals’ credit information every month, but they never take out time to remind an individual that a certain amount still remains unpaid. If this is not ironical, then what is it?

Sadly, even regulators around the world remain a mere spectator of this game and seldom take concrete steps to fix the malaise except making token gestures sometimes.

Talk to any banker or financial expert – but apart from talking about the importance of having a good credit profile and giving a few tips on how to improve your credit score, most of them simply refuse to comment on the flaws of this system which are prevalent not only in India but across the world, even in developed nations like the US. On the contrary, most of these experts and lenders will ask: “Is there any other way to gauge one’s credit worthiness?”

May be. However, the current system is not 100% foolproof. There are loopholes and a strong possibility of misreporting of data.

The Flaw

The biggest flaw in the consumer credit-scoring system is that it seems to work on the premise that all individuals are likely defaulters and prone to becoming habitual offenders, while all banks, financial institutions, creditors and their staff are seen as saints who can never do anything wrong!

That is why while consumers are put under 24-hour ‘surveillance’ and every activity of their gets recorded and reported (from repayment history to credit utilisation to types of credit accounts and from phone numbers to change in address), no one even bothers to look at the ‘activities’ of lenders even if their staff and top management are found involved in multi-crore scams. Earlier there used to be numerous reports of the high-handed and illegal behavior of recovery agents trying to recover money on behalf of their banking clients, which even led to many deaths by suicide in India and the courts had to finally intervene.

However, have you ever heard of any bank or FI getting ‘blacklisted’ or their rating ‘downgraded’ because of any scam or the death or harassment of consumers? Neither is there any instance of any bank ever being denied credit or even fined for sending wrong data. The fact is no one, including the bureaus, ever questions what lenders report or do unless they themselves get questioned over something.

Keeping in view this scenario as well as the astounding number of errors in credit reports and the stakeholders’ reluctance to take note of the consumers’ woes, some financial and legal experts even claim – “Your credit score is a scam designed to keep you in debt!”

Found it hard to believe? A case study

Years ago a Delhi-based individual named Ajay (name changed) needed a personal loan of Rs 5 lakh to cope with a financial emergency. However, despite running from pillar to post, he was unable to get the loan. This is despite him earning a good salary, working in a company of repute and residing in his own home. In the next 4 to 6 months his loan applications got rejected by around 8 to 10 banks, without telling him the actual reason. Frustrated, Ajay finally decided to use his own clout as he was a financial journalist working with a large financial newspaper. Getting to the top management of any of India’s banks was easy. He got in touch with the MD of a bank to know the actual reason for the loan rejection. Ajay was finally informed that his name was in the defaulters’ list of Cibil as he had not cleared a personal loan of Rs 1.5 lakh. Even the MD was not willing to disclose to Ajay the name of the bank, citing professional secrecy as the main reason.

This information itself came as the biggest shock of his life as at that time, as per Ajay’s knowledge, he had cleared all his loans and credit card dues years ago. Then how was his name in the defaulters’ list? And which bank had done this?

It should be noted that at that time only banks and FIs had access to one’s credit report and it was very difficult for the general public to see one’s own report (most even didn’t have any idea of the existence of the credit scoring system). Ajay remembered that years back he had taken a Rs 1.5-lakh loan from XYZ Bank (name changed). He checked his files again and found that he had already cleared that loan. So, what was the problem? The next day he visited the very bank with the receipt of Full & Final Payment. He was informed by the bank that a sum of Rs 100 was still due against his name.

Ajay asked them four questions. First, how can this happen after making the Full & Final Payment? Second, even if the amount was due, then why was he not informed about that? Third, how can an amount Rs 1.5 lakh be shown in the Cibil report as ‘Written Off’ against a small outstanding amount of Rs 100? And, finally, was that act worth branding someone a ‘defaulter’ and making him a financial outcast?

Ajay’s threat of legal action got his matter resolved.

Ajay, however, was not offered any compensation for the mental and physical harassment he suffered. Neither the lenders nor credit bureaus ever apologise to such hapless people whose life and financial future get ruined because of such ‘irresponsible’ acts of theirs.

Incorrect Data

This is not the only instance of an error in the credit report. According to a recent report, 2 in 3 credit score complaints in the U.S. are over wrong information. The U.S. consumer credit watchdog, in fact, had received 197,709 credit report complaints between September 2021 and 2022. Of those complaints, 66% were over information in the report that belonged to someone else, according to Investopedia.

If this is the situation in the US and other developed countries, then one can imagine the situation in a country like India where most people don’t even bother to check their credit reports and many are not even aware that such a system does exist. But who is bothered? Strangely, whenever you make a complaint, the credit bureaus claim that they are not responsible for the accuracy of your credit report as they only report the data given by financial institutions. Also, they can’t make any changes to the data.

“As per law, credit information companies (CICs) are not authorized to make any changes to the data unless confirmed by the credit institution concerned,” Bhushan Padkil, Senior Director and Head of Consumer Interactive (Direct-To-Consumer) India, TransUnion CIBIL, informed us in response to the queries sent to them.

He added, “Credit information solutions help create economic opportunities for millions of people in India, and we take our responsibility to deliver accurate data very seriously. We work constantly to strengthen the credit information ecosystem for the public good. Credit information solutions have helped catalyze lending in India by providing data and insights to enable credit institutions to make informed credit decisions.”

But how to ensure that despite having responsible credit behaviour, your credit report is really good and error-free? For this you need to keep checking your credit report regularly because as per the prevailing norms, only you are supposed to observe and ensure that your credit profile remains positive and accurate, and no one else – neither the bureaus, creditors or the regulator – will take the responsibility for its accuracy.

If any inaccurate information is found on one’s credit report, one can raise a dispute with the credit bureaus through various modes. However, contrary to the claims, all the disputes don’t get resolved so easily and there is a long process for this.

To avoid errors, keep checking your credit reports regularly (now free once a year in India and by paying the required fees subsequently) and also keep paying higher interest to banks if your score is poor. And then there are hundreds of advisers – apart from cedit reporting agencies and financial institutions — who keep highlighting the importance of a good credit score.

US-based debt relief lawyer Jay Fleischman, in his book Money Wise Law, writes, “By heavily marketing the importance of credit scores, credit reporting agencies and financial institutions further reinforce the belief that a high score is essential for financial success. In the process, they make $120 billion in credit card interest and fees each year. Services like Credit Karma (owned by Intuit, the makers of QuickBooks and TurboTax) raked in $375 million in 2022, largely by scaring people into believing a credit score was the path to a better life…. The wealthy make money by convincing everyone to play a game that keeps them poor.”

Identity Theft, Financial and Credit Card Frauds

Apart from human errors, things like identity theft, financial and credit card frauds, disputed transactions etc, may also impact one’s credit profile. For instance, like many other countries, in India too every year thousands of people become a victim of financial and credit card frauds apart from identity theft. Then there are the numerous cases of credit card disputes, some of which never get resolved but do negatively impact one’s credit profile.

To take an example, a total of 9,053 cases of frauds were reported in various banking operations amounting to Rs 45,598 crore in 2021-22, according to the RBI data. A report released by the National Crime Records Bureau (NCRB) shows that 3,432 cases of debit and credit card fraud in India were registered in 2021, an increase of nearly 20% from 2020. And these are only the tips of the iceberg.

The recent incident of fraud involving Bollywood actor Sunny Leone, in which her PAN card was used to get a loan which also affected her credit score, is a case in point. Another example is of Arun Panicker, a former chief analytical officer at a credit agency, whose credit score had got badly impacted because of a 9-year old disputed payment – also proving the point that disputed transactions can blot one’s credit score even if someone hasn’t done anything wrong.

Skewed System

Under the rule of law, if someone commits a crime, then that person gets prosecuted and is informed by the court about his crime before being sent to jail. But here is a system whereby you get branded as a financial offender without someone letting you know about your ‘crime’. No alert, no SMS, no mail, no phone call – and you just become a ‘criminal’, sometimes without any fault of yours or because of the wrongdoings of others who get involved in financial crimes by stealing the identity of yours. How would you know that someone has got a new car or a new loan on your identity if you don’t get informed about this even if someone is defaulting on EMI payments or is hiding somewhere after taking the loan?

Thankfully, keeping in view the woes of consumers, the RBI had in June last year imposed a combined penalty of about Rs 1 crore on all the four credit information companies (CICs) — including TransUnion CIBIL, Experian India, Equifax, and CRIF High Mark — for inaccurate and incomplete data. In October last year, lenders, FIs and credit bureaus were also directed by the apex bank to resolve customer complaints within 30 days or pay a fine of Rs 100 per day.

The RBI had also directed CICs to alert customers through SMS or email when their Credit Information Report (CIR) is accessed by banks or NBFCs. Also, credit institutions will have to send an SMS or email alert to customers when they submit information to CICs on their default or Days Past Due (DPD) on existing credit. However, while these steps are welcome, they seem to be too late as much damage has already been done.

Padkil of TransUnion CIBIL said, “TransUnion CIBIL is committed to delivering the highest levels of consumer support, and we are working through the details of the Reserve Bank of India’s directive. The aforesaid circulars are effective April 25, 2024, and we are ensuring full compliance with the requirements thereunder.”

“Indian consumers can access their Free Annual Credit Report (FACR) via the TransUnion CIBIL website through an easy and quick authentication process and without any fees,” he added.

However, when we checked, the so-called Free Annual Credit Report was showing one-year old data, and we got logged out at least 6 to 7 times, before we were able to finally see the report.

Is the Consumer Credit Scoring System Useless?

No responsible person in the world will suggest that the consumer credit scoring system is useless or that EMIs don’t get bounced or there are no willful defaulters in this world. There are, in fact, many people around who are habitual offenders and indulge in financial frauds, whose data needs to be reported. However, there are also many individuals who may sometimes default on EMI payments owing to some reasons beyond their control.

For instance, some may have a car accident or a serious health issue that may put them in a financial problem for some time. Some may become jobless for a few months (remember the job cuts post the recessions of 2000 and 2008?) and may become unable to clear the EMIs on time. Sometimes some of them may have to go for settlements also for paucity of funds. But does this make them a willful defaulter? Despite this, if someone is putting them in the defaulters’ list because that is the system, then shouldn’t such people also be given a chance to explain the reason for the default which should also be put in the credit report? And let the creditors decide (after verifying everything) whether they want to lend money to such persons or not?

However, this may never be done because of obvious reasons. How will the business run if most of the people are given a clean chit and a majority of people don’t feel any need to check their credit reports regularly and creditors don’t pay for accessing the credit reports? And on what grounds higher interest will be charged from a section of people if their credit scores also remain as good as those of others?

No wonder, Rick Gregory once remarked – “Isn’t it sad that we have to gain control of the artificial numbers placed upon us by others to regain some control of our lives?”

But who is willing to listen to the woes of consumers?

It may be noted that credit information companies in India are governed by the Credit Information Companies Regulation Act, 2005 and various other rules and regulations issued by the RBI. Still, the fact is that even today the game of credit scoring seems to be heavily loaded in favour of lenders, very much similar to the Korean television series ‘Squid Game’ in which the unseen creators of the game set all the rules and regulations as per their whims and fancies, and one by one the contestants get eliminated if they are unable to survive!

2024-03-07T12:08:29Z dg43tfdfdgfd