Even before people start earning, they get introduced to the world of 3C’s – “credit reports” and “credit scores”, kept by the 3 “credit bureaus”. Why these 3C Are’s important and what control can you exercise to ensure you keep these 3C’s on good terms. For you to get the best credit terms on your mortgage or auto loan or even credit cards, you must take care of these 3C’s.
Main job of credit bureaus, Experian, Equifax and TransUnion, is to keep a track of each person’s past credit history and after that create a report and generate a score from that collected data. So, your past financial history such as payment track record of your credit card, loan (home loan mortgage, auto loan, or any other type of loan), your repayment history and total number of time you have sought credit is recorded in a single report, a “credit report”, and the first C. On the basis of this information a score is generated, called the “Credit Score”, the second C.
Finally, this data is shared with banks and other lenders by the third C, the “credit bureau” on their request. When you approach a lender for a new loan or even renewal of an existing facility, the first thing they do is to access your 2C’s from the third C. Only then would they decide whether to extend you credit and if yes, at what terms.
This idea looks perfect because the system ensures that there is extensive record keeping of a person’s credit behaviour and this useful data can help the banks and lenders take effective credit decisions. But the problem starts when your credit report is messed up not because you defaulted on some payments but because somewhere in the system, the record keeping was not correct.
What are wrong credit reports and how they are destroying the financial lives of people?
From the past couple of years, we have been hearing plenty of horror stories that how many financial lives have been destroyed due to wrong data in their credit reports. How can you as an individual ensure that the data in your credit report is 100% correct?
First, let us tell you why this is a problem you must care about:
Suppose you are a student who wants to take an education loan and when you apply for the loan, bank rejects the loan application as they are unable to find your credit history – perhaps because you have never availed a loan or credit in the past.
Another situation could be when a person applies for a home mortgage but the bank rejects the loan application because the credit report carries an outstanding dues entry for a credit card which you have already closed many years ago.
Reasons for wrong data in the credit reports:
It is not as if someone is playing mischief with you. It’s just that the data in a credit report is pulled from multiple sources which are incorrect themselves. Unfortunately, this is a system fault but its effects are often faced by the individuals and not the credit bureaus or banks that generate and maintain this data.
Other major problem is delayed communication between the bank and the credit bureaus.
3 things to do to keep the 3 Credit C’s in good health:
First and foremost, you must periodically check your credit reports by availing the free report entitlement and check that the data is correct.
Secondly, if you are likely to need a significant loan in the future, start building your credit history by availing small loans or credit cards. Remember to be regular with your payments against these loans and cards.
Thirdly, ensure that you are not a victim of an identity theft or identity fraud where some unauthorized person avails credit from banks masking his own identity with yours. Such loans will appear in your credit report and must be notified to the bank and the credit bureau immediately on being sighted.
By practicing these three, you can ensure that you avoid the consequences of wrong credit reports and you maintain a healthy credit score at all times.