Your financial health is very important, and a key part of this is your CIBIL rating. This rating helps lenders decide if they should give you money and on what terms. Sometimes, things can go wrong with your loan payments, leading to negative statuses like DPD (Days Past Due), SMA (Special Mention Accounts), and even loan write-offs. Understanding these terms is crucial because they can seriously affect your ability to borrow money in the future. This guide will help you understand what these terms mean and how they impact your financial standing.
What is Your CIBIL Rating and Why Does it Matter?
Your CIBIL rating is a three-digit number, usually between 300 and 900, that shows how good you are at managing your money and repaying your debts. It is like a report card for your borrowing history. Every time you take out a loan, use a credit card, or pay your bills, this information is recorded. This history is then used to create your CIBIL rating.
Why a Good CIBIL Rating Helps You
Having a good CIBIL rating, typically 750 or higher, makes your financial life much easier. When you apply for a loan, a credit card, or even some rental agreements, lenders and service providers will look at your rating. A good score tells them you are a responsible borrower who pays on time. This means you are more likely to get approved for loans, and you might even be offered better interest rates, saving you money in the long run.
How Your CIBIL Rating is Calculated
Your CIBIL rating is calculated based on several factors from your credit report. These include:
- payment history: How regularly you pay your bills and loan instalments on time. This is the most important factor.
- Amount Owed: The total amount of money you owe across all your loans and credit cards.
- Length of Credit History: How long you have been using credit. A longer history of responsible borrowing is generally better.
- New Credit: How often you apply for new loans or credit cards. Many applications in a short time can suggest you are desperate for credit.
- Types of Credit: The different kinds of credit you have, such as home loans, car loans, and credit cards.
What is DPD (Days Past Due)?
DPD stands for “Days Past Due.” This term refers to the number of days you are late in making a payment on your loan or credit card. For example, if your loan payment was due on the 1st of the month and you pay it on the 10th, you have 9 DPD.
How DPD Appears on Your Credit Report
On your credit report, DPD is shown next to each payment. It will typically appear as a number, such as ’30 DPD’, ’60 DPD’, or ’90 DPD’, indicating how many days late you were. If you paid on time, it might show ‘000’ or ‘STD’ (Standard).
The Impact of DPD on Your CIBIL Rating
Even a single DPD entry, meaning you were just a few days late, can negatively affect your CIBIL rating. The longer you are past due, the worse the impact. A 30 DPD will hurt your score, but a 90 DPD will cause much more significant damage. Lenders see DPD as a sign that you might struggle to manage your finances, making them less likely to approve your future applications.
Understanding SMA (Special Mention Accounts)
SMA, or Special Mention Accounts, is a system used by banks to identify loans that are showing early signs of potential trouble, even before they become severely overdue. It acts as an early warning signal, allowing banks to take steps to prevent the loan from becoming a Non-Performing Asset (NPA).
The Different Types of SMA: SMA-0, SMA-1, and SMA-2
SMA status is categorised into three types, based on how many days the payment is overdue:
- SMA-0: Your payment is overdue for 1 to 30 days. This is the earliest warning sign.
- SMA-1: Your payment is overdue for 31 to 60 days. The bank is now more concerned.
- SMA-2: Your payment is overdue for 61 to 90 days. This is a serious stage, just before the account becomes an NPA.
Once a payment is overdue for more than 90 days, it is typically classified as an NPA, which is a much more severe negative status.
How SMA Status Signals Trouble for Your Account
When your account is marked as an SMA, it tells your bank and other potential lenders that you might be having difficulty making your payments. Banks will start monitoring your account more closely and may contact you to understand your situation. This status is a red flag on your credit report and can make it difficult for you to get new loans or credit in the future.
Preventing Your Account from Becoming an SMA
The best way to prevent your account from becoming an SMA is to always pay your loan instalments on time. If you foresee any difficulty in making a payment, it is crucial to contact your bank immediately. Explaining your situation and discussing possible solutions, such as a temporary payment plan, can help you avoid an SMA status and its negative consequences.
What Does a Loan Write-Off Mean?
A loan “write-off” means that a bank has removed the loan from its active books. This happens when the bank believes it is unlikely to recover the money owed from that particular loan. It is a way for banks to clean up their financial records.
Why Banks Sometimes Write Off Loans
Banks write off loans for various reasons, mainly when a borrower has failed to make payments for a very long time, or if the borrower has become bankrupt and cannot repay. While a write-off helps the bank manage its balance sheet, it is important to understand that it does not mean your debt is forgiven.
The Long-Term Effects of a Write-Off on Your CIBIL Rating
A loan write-off is one of the most severe negative entries that can appear on your credit report. It causes significant and long-lasting damage to your CIBIL rating. This negative status will remain on your credit report for many years, typically seven years, making it extremely difficult for you to get any new credit during that period. Lenders will see a write-off as a clear sign of high risk.
Your Obligation to Repay After a Write-Off
It is crucial to remember that even if a bank writes off your loan, your obligation to repay the money does not disappear. The bank still has the legal right to recover the debt. They can continue to pursue collection efforts, which might include legal action, to get the money back from you.
How These Negative Statuses Affect Your Future Borrowing
DPD, SMA, and loan write-offs all paint a picture of financial risk to potential lenders. These negative statuses have serious consequences for your financial future.
Making It Harder for You to Get New Loans
When you apply for a new loan or credit card, lenders will check your CIBIL report. If they see DPD entries, an SMA status, or especially a loan write-off, they will likely view you as a high-risk borrower. This significantly reduces your chances of getting approved for any new credit, whether it is a personal loan, a car loan, or a home loan.
Higher Interest Rates for You on Future Credit
Even if a lender decides to offer you credit despite your negative history, they will consider you a higher risk. To cover this increased risk, they will often charge you much higher interest rates. This means you will end up paying a lot more money over the life of the loan compared to someone with a good CIBIL rating.
Steps You Can Take to Improve Your CIBIL Rating
While negative statuses can be damaging, it is possible to improve your CIBIL rating over time with consistent effort and responsible financial habits.
Paying Your Bills on Time, Every Time
This is the most important step. Make sure all your loan instalments and credit card bills are paid by their due dates. Set up reminders, or even better, automate your payments to avoid missing any. Consistent on-time payments will gradually build a positive Payment History.
Checking Your Credit Report Regularly
You should regularly check your credit report to ensure all the information is accurate. You are entitled to one free full credit report from authorised credit bureaus each year. Review it carefully for any errors.
Addressing Any Errors Quickly
If you find any mistakes on your credit report, such as payments you made on time being shown as late, or accounts that are not yours, you must act quickly. Dispute the errors with both the credit bureau and the lender immediately to get them corrected.
Seeking Help If You Struggle to Pay
If you find yourself struggling to make payments, do not ignore the problem. Contact your bank or lender as soon as possible. Explain your situation honestly. They might be able to offer solutions like restructuring your loan, creating a revised payment plan, or giving you a temporary break, which can help you avoid further negative entries on your credit report.
Building a Healthy Financial Future
Understanding and managing your CIBIL rating is a fundamental part of building a healthy financial future. By being aware of DPD, SMA, and write-offs, and by consistently practising responsible financial habits, you can protect your credit rating, ensure easier access to credit when you need it, and secure your financial well-being. Always aim to pay on time, monitor your credit report, and seek help if you face difficulties.
Author
