Thursday, 16 March 2017

Why Foreclosure of loan impacts your CIBIL Score

Though all kind of loans have become very common now yet most borrowers feel that it is kind of a burden that they should get off as soon possible.  It may seem like a good idea to repay the loan earlier than the original term specified (if one has surplus funds) to reduce the interest cost and also the mental burden that one associates with a loan.  Before foreclosing a loan the borrower needs to consider various aspects like the tax factor in case of home loans, prepayment charges if applicable, the savings in terms of the interest paid compared to the loss of an investment opportunity (the funds that are used for foreclosure can be invested elsewhere). Apart from this another factor that must be considered is the impact on the CIBIL Score if any.
Loan Foreclosure Explained:
Loans are taken at an agreed rate of interest for a specified time period which is known as the loan term. When the borrower pays the amount before the specified term it is known as foreclosure or part prepayment depending on how much is paid. When the repaid amount is part of outstanding amount then it is known as partial payment and if the entire outstanding amount is repaid then it is known as foreclosure of loan. Depending on the lender’s policies and the type of loan the rules for pre-payment and foreclosure may vary.
How Loan Foreclosure Impacts CIBIL Score?
The borrower may feel foreclosure is a good thing financially as well as for the credit rating but it is not so. From the lender’s perspective this may not be the case as the lender has planned for interest inflow for the entire loan tenure, prepaying a loan can upset the lender’s projections. Foreclosing a loan leads to idle cash being piled up at the bank which can cause them worry. Lenders generally try to dissuade borrowers from paying early on foreclosing a loan but for home loans the penalty charges have been waived off by most lenders for home loans at least.
Now let us assess the impact of foreclosure on the credit rating. When one repays a loan regularly it creates a healthy credit trail which helps in creating a good credit score. Repayment history is the biggest factor that contributes (35%) to the CIBIL Score. A deeper credit history gives a better picture about the loan bearing capacity and also the creditworthiness of an individual which helps the lenders in assessing the applicant. A well serviced loan that runs for the full duration will help in creating a healthy credit rating.
A healthy credit mix is very important for a good credit rating; this means that there should be good balance of secured loans like home and car and unsecured loans like a personal loan and credit card borrowings. So if the borrower repays a secured loan then it is likely to skew the ratio of secured and unsecured loans which is likely to adversely impact the credit rating.  However repaying a personal loan is not likely to impact the credit rating so much and in certain cases may actually benefit the credit rating.
A person with higher ratio of secured loans presents a more reliable picture then someone with only unsecured loans. Secured loans are backed by collaterals and have lower EMIs when compared to unsecured loans, which means in case of default the risk is mitigated. Repaying a loan also compromises the liquidity of the individual temporarily. A loan that is managed well and runs the course of the entire loan tenure reflects a person who is good at managing his finances and planning ahead.
In certain situation foreclosing a loan may be beneficial. This could be if one has an expensive loan which he/she wants to repay or if one is already overleveraged then they might want to repay a loan and try and take some time to get their credit rating back in shape
The impact of foreclosure of a loan may vary from situation to situation. In some situations it can help the person better his score; like if they are prepaying unsecured loans to balance the ratio of secured and unsecured loans or if they are already overleveraged. In some situations foreclosing a loan may temporarily dip the score but it will be a short term impact only.
Before foreclosing a loan one should consider all aspects (as mentioned in the beginning) and not only the impact on the credit rating before making this decision.

Wednesday, 8 March 2017

Do not let Cash Crunch Impact your CIBIL Score

No one wants to get in a cash crunch. However, life is unpredictable and you can never tell when you are going to get short on cash. A good example of this is the bold step of demonetisation taken by our Hon’ble Prime Minister Shri Narendra Modi recently. Although it has been a while since the movement started, the effect is still there. In many parts of India people are still having money problems. There are still long queues outside of ATMs and inside of banks.
Although in an event of cash crunch you do have to face a lot of inconveniences, it can also impact your CIBIL score. By not paying attention to your credit score you can make things even worse for yourself.
Here are some of the ways you can deal with a cash crunch and protect your credit report from damage:
1. Save Money by Cutting Expenses
The most important thing you need to do to is cutting on expenses. You can’t afford to spend on luxuries when there is a shortage of physical cash. So, round up your expenses and identify the ones you can do without. For instance, you might want to stick to eating homemade food only, doing with whatever clothes you have in your wardrobe, etc. for the time being. Use the saved money in repaying your credit card bills, loans, and also other important expenses that can’t be ignored.
2. Try to Get Longer Credit Periods
If you are a businessman then cash crunch can be especially troublesome for you, as you have to pay your vendors and employees apart from handling your own personal expenses. Thus, what you can do is explain your situation to them and request for longer credit periods. People are usually quite understanding, and if your vendors have been associated with you since a long time they will be happy to extend credit terms to you. 
With favorable credit periods, you will be able to keep your business operational, and thus make money while paying your loans and credit card bills.
3. Using Plastic
Since the government is pushing electronic payments they have lifted many types of credit card charges. Thus, now is a good time to use credit cards as much as possible. Not only you will get some respite this way, you will also save money as well. However, be sure to keep your credit utilization in control as excessing usage can be detrimental to your credit score. Ideally, you should not spend more than 30% of your credit limit. Thus, if the limit on your credit card is Rs. 2 lakhs then you should spend less than Rs. 60,000 a month.
Many people have started using credit cards excessively due to the demonetization. However, this has resulted in many of them ruining their credit reports. If you really have to use credit cards often then maybe you can talk to your bank about it and explain that your excessive utilization should not be put in a bad light. Understanding your situation your bank may decide not to have CIBIL record your activities in a negative way.
4. Staying Alert
Cash crunch can easily cause panic, and you can end up making rash decisions that can affect your credit score negatively. While you should perform a credit check irrespective of whether there is a cash crunch or not, its significance is definitely greater in that particular event. You can easily get your CIBIL rating online and you can even pay the fees the same through wire transfer or credit card, etc. For instance, CIBIL has a simple online process for a customer who wants their CIBIL rating and CIBIL report. You can fill out a small form, submit fees, and get your report in a few days. By checking your report every once in a while during cash crunch you can see if your score is dropping. In case it does, then you can take appropriate measures to prevent further damage and recover the lost points.

Cash crunch is never fun for anyone. However, you should not let it affect your credit score as improving it later can take a long time. So, stay focused and stay positive even in the most difficult cash crunch period. Like all bad times, it too shall pass. 

Wednesday, 1 March 2017

Good CIBIL score is an outcome of good credit management

What you sow is what you reap. You learnt this idiom in school and saw its application in various aspects of your life. You got good marks if you studied hard. You landed a good job if you prepared well for the interviews. The same “Law of karma” applies to credit management as well. Good credit management habits lead to a good CIBIL score.

Your credit report is a reflection of how you handle your loan and credit card accounts. A good payment behavior builds a sound credit profile and leads to a good credit score. This helps you to easily qualify for loans at low interest rates. Cheaper loans mean that you have more money in your pocket to save and keep for emergencies.

It is very important to develop good credit habits from the start. From the time you get your first credit card you should know how to shoulder the responsibility of taking a debt. You should be well aware of the interest charges and the importance of making payments on time. It is very common for youngsters to land up in serious debt when they open several credit card accounts without fully understanding how to use them. If you do not want to make that mistake then you should follow some fundamental rules of good credit management that will help you build a good credit history.

Borrow but wisely

It is true that you need to take on a debt in order to demonstrate your repayment habits and improve your credit score. But do not borrow if you cannot afford to pay. It is good to make a budget and stick to it.  Identify an amount that you can set aside each month to repay the debts and stay within that limit. Use different types of credit instruments like credit cards and installment loans to show your ability to handle various types of credit.

Keep balances low

The ratio of the outstanding balances on the credit card to the total available credit limit determines a large part of your credit score. Keeping your balance low is a sign of good credit management. It signals that you are not overly dependent on credit. This gives a boost to your credit score.

Pay the card balances in full

Credit cards give you the option of rolling over your balances to next month by paying only the minimum amount due. But since credit card debts attract huge interest charges it is not a good habit to do so. Pay the balance in full to keep your debts under control. If you can’t pay it full at least pay a substantial amount to show your willingness and ability to repay your debts.

Pay on time

On time payments of credit card bills and EMIs help in building a solid foundation of your credit score. Late or missed payments, or any remarks of foreclosure or collections signify that you are a risky borrower. These negative remarks get reported to the bureau and have a rippling effect on the credit score. Set up a direct debit from your account to make sure that the payment is always done before the due date. You may also set up mobile or email alerts to remind you of the payment due date.

Check your credit report
It is always a good habit to check your credit report at least once a year to monitor your own credit performance and identify areas that you can work upon to improve your credit score. A careful review of the report also helps in uncovering errors. Report the errors immediately to avoid it from ruining your reputation as a trustworthy borrower.
Have an emergency fund
Put aside at least 10% of your monthly income to build up an emergency fund. Such a reserve saves you from a lot of worries when an unexpected expense comes up.
Good credit habits not only help you in maintaining a good credit score, but they also help you to take charge of your finances as well. So make these habits a part of your financial plan.

Monday, 13 February 2017

How credit bureaus calculate your credit score?

Before offering a new line of credit, be it a mortgage loan or a credit card the lenders evaluate your application based on your CIBIL score. The higher the score, the more confidence the credit institution will have in your ability to repay the loan. Hence a good score not only increases the chances of getting credit but also gives a greater bargaining power during interest rate negotiations.
In order to maintain a good credit score it is important to know how the credit bureaus calculate this score. In India there are three credit rating agencies CIBIL, Equifax and Experian who collect the borrower’s credit information records. The member banks, credit card companies and other formal lenders regularly send updates and status to the bureaus.  It includes all the information that is needed to build your credit profile, like details of all the loans you have taken, EMI and credit card payments, any late or missed payments, total credit limit, balance outstanding etc. They use advanced analytical techniques to assign a number ranging between 300 to 900; that reflects your financial health and gives a snapshot of your credit behaviour to the potential lenders. Each credit bureau has its own proprietary algorithm to calculate the score. However all the elements that affect the score revolve around the loan repayment behaviour of the individual. Different weightage is given to different aspects of your financial behaviour. Here is a quick glimpse into the factors that determines a person’s credit score.
Past repayment behaviour
The biggest factor that determines the credit score is the payment history. The credit bureau has a month-on-month record of all the payments that you have made towards EMIs and credit card bills. They have an up to date status of each account, whether you have made all past payments on time, after the due date or missed them. In order to score high on this aspect you need to make all the payments well within the due dates. Your name in loan defaulter list or delayed payments signals that you have trouble servicing your obligations and therefore affects the score negatively.
Credit utilization
Credit utilization is usually referred in case of credit cards. It is the outstanding balance on all your credit cards as a percentage of the total credit limit sanctioned to you on all cards. If the percentage of limit that you are utilizing is high then your credit profile is considered as risky. It affects the credit score negatively. In order to use this factor to your advantage make sure that you do not use more than 25% of the credit limit.
Credit Mix
The composition of your loan portfolio also determines your credit score. Lenders want to see whether you are able to handle different types of credit responsibly. Hence it will be good for your score if you have a mix of both secured and unsecured loans. If you have only a single type of credit like a credit card or a personal loan then you may not score high on this aspect even if you have made timely repayments. Mixing it with a secured debt like a home loan or a car loan will help you maintain a good score.
Other factors
Length of the credit history and number of credit applications made in the recent past are some other important factors that are also taken into consideration during the cibil score calculation. The longer the period for which you have been handling credit the better it is for the score. If you have made too many credit applications in the past then it portrays you as a credit hungry person and hurts your score negatively.

The mathematical formula used by the credit bureaus to calculate the credit score is not known to general public. However the above factors are the main elements that go into the constitution of your score. Taking care of these aspects will help in building your credibility. Timely payments of EMIs and credit card bills, low credit utilization and a mix of different types of credit accounts will strengthen your credit profile and fetch you a high credit score. A good score will ensure that you get loan approvals without any hassles and at the best interest rates. 

Friday, 10 February 2017

Why is a Good CIBIL Score Required for an Education Loan?

Education plays a direct role in your success- there are no two ways about it. However, what do you do when the lack of money comes in the way of receiving the education you deserve? Most students secure money for their expensive college tuition through an education loan. However, not all education loans are approved easily. In fact, the number of education loans that get rejected everyday is staggering. 
Here are some of the common reasons why banks and other financial institutions may reject your loan application:
1. Poor Academic Performance
Academic performance is an important factor that influences your loan application. Sometimes students get admission in reputed colleges through reservation, but have a poor academic record. In that is the case, a lender may reject your loan application.
2. Nature of the Course
Lenders are often quite selective with their course preferences. Education loans applied for expensive courses such as medical or engineering are more likely to get a green signal in comparison to others. This is because it is assumed that since you are likely to receive good salaries after completing such courses, you are also more likely to repay the loan easily and in a short period of time. So, if you are applying for an inexpensive course then again the lender may turn down your application.
3. Assets and Family Income
Lenders also consider the assets owned by the family of the applicant, and the income of the parents. If they own real estate or other expensive assets then there is a certain sense of security experienced by the lender, and they are comfortable in approving the loan application.
The three reasons mentioned above are important. However, there is another major reason, perhaps bigger than the all three above, that may be the reason why your loan application is being rejected again and again. Your CIBIL score is highly influential in determining whether your loan application will be rejected or accepted.
Why a good CIBIL Score necessary to get an education loan?
Your CIBIL score is the score of your creditworthiness. In other words, if you have a high credit score then it means you are a responsible credit user, and are most likely to repay your loans or credit card bills on time.  On the other hand, a poor score reflects bad credit management, history of missing payments, CIBIL dispute, etc.
When your score is below average then your profile is considered risky, and unless you are willing to accept an interest rate that is a lot higher than the standard (to balance the risk), your lender won't want to approve a loan.
Even if your score is decent, and your academic records are promising then also your application may get rejected. This is possible if your parents' CIBIL score is not up to the mark. Some banks consider the score of both the student and their parents. Thus, it helps to have a high credit score whether you are the applicant or the parent.
How can I Improve My Credit Score?
If your score is below average then you needn't worry. You can improve Cibil score easily. Although it may take a lot of time depending on how bad the score is.
Here are a few things you can do to improve the score:
·        No More Late Payments: If you have an existing loan, or a credit card then make sure you make the payments on time. Timely payments have direct positive impact on your score.
·        Checking for Mistakes: If you have been a responsible credit user in the past, and have never defaulted on a loan or delayed payments, then maybe you can check your credit report yourself. Sometimes a poor score could be the result of discrepancies or errors in the credit reports. If you find an error, you can get it corrected to improve your score.
·        Cut down on Your Credit Usage: Excessive credit usage can be detrimental to your credit score. This often happens to those who own credit cards. If you have been spending too much using your credit card, then you can limit your usage to improve the score considerably.

To get any kind of education loan, a decent CIBIL score is a must. If you are about to apply for one, make sure you check your score first. With a good score you can improve the chances of loan approval to a great extent. 

Thursday, 2 February 2017

Why is your credit score different on different credit bureaus?

Anyone who has some basic knowledge about credit score and credit report knows that CIBIL is the credit bureau which is responsible for credit score regulation and calculation, apart from handling CIBIL dispute. Thus, when people apply for home construction loans, instant personal loans, etc. or credit cards they check their CIBIL score to get an idea of their creditworthiness. However, a lot of people are unaware that there are a few other credit bureaus as well, which are as powerful as CIBIL. Although it remains true that CIBIL is the most preferred and popular credit bureau.
Crif Highmark, Experian, and Equifax are the three other major credit bureaus of India apart from CIBIL which are often referred to by the banks. Each one of these follows a different standard for credit score calculation, and also has a different score bands. However, one thing that stays common amongst all, is that the higher is you score, higher is your creditworthiness.
The Scoring Model Differs from One Bureau to Another
Every credit bureau follows a different procedure for the calculation of someone's credit score, which is why you will get a different report from different bureaus. This is because one bureau may give more emphasis on certain factors, and a different bureau on another. For example, CIBIL might be giving more importance to the variety of credit forms an individual is using than other factors, and Equifax on the credit utilization ratio. So, if you tend to spend a lot of credit, and thus have high credit utilization, then your CIBIL score may be higher than Equifax, as per the hypothesis it penalizes high credit utilization more than CIBIL.
Why so Many Credit Bureaus?
When CIBIL has set a hallmark for credit evaluation, it is natural to wonder why we needed other credit bureaus as well? Unfortunately, there is no clear and concrete reason behind it, only that different banks prefer different kinds of credit benchmarks, and this variety in credit bureaus allows them to associate themselves with the ones they are most comfortable with.
Credit Score Limits
Every credit bureau follows a certain credit score range. A CIBIL score ranges from 300 to 900, Crif Highmark score ranges from 300 to 850, Experian score ranges from 1-1000, and Equifax score ranges from 1-999. No matter which bureau your bank refers to, you score must be close to the upper limit to suggest high creditworthiness.
One important thing to learn here is that the same score may be good or bad depending on the bureau referred to. For example, while a credit score of 600 is still decent if provided by Crif Highmark, if the provider is Experian then not so much. The reason is the upper limit created by these bureaus. The upper limit of Crif Highmark is 850, and your score 600 is just 250 short of becoming perfect. However, since the upper limit of Experian is 1000 your score will be considered poor as it falls within the middle zone.
Which Credit Score is the best?
A lot people wonder which credit score is the best credit score. Truth is- there is no such thing. Every credit bureau follows the same credit principles. There are just minor variations. However, this doesn't mean that the score provided by one bureau is better than the other. You just have to make sure you take the common precautions and measures when you use credit. If you will manage your credit wisely, your score will be excellent no matter which bureau's credit report you get.
Here are a few basic things to follow in order to build a strong credit score:
          Always try to make your loan repayments on time. If for some reason you have missed a payment then make sure you pay it ASAP in order to prevent your name from being included in CIBIL defaulters list.
          Don't use your credit cards excessively. High credit usage is always detrimental to the credit score. If you have a lot of credit cards, then you can also close a few of them for better management.
          Check your credit report frequently(the choice of credit bureau is irrelevant). If you spot any mistakes or discrepancies then have them corrected by contacting your financial institution. This will be likely to enhance credit score.
          Maintain a good balance of both secured and unsecured forms of credit.

If you will follow the tips given above religiously, you won't have to worry about which credit bureau to refer, as your score will be excellent in each one's report.

Saturday, 28 January 2017

Debunking the Myths of Credit Score

The concept of CIBIL rating or credit score is still new for many people in India. Although people are realizing its importance, they still don't have the full understanding of how it works.  Thus, it is no surprise that there are a number of related myths that are floating around.
Here are some of the most popular myths of credit score debunked for you:
Myth #1: Checking Your Credit Reports Has a Negative Impact on it
A lot of people shy from checking their own credit report, worrying that this will have a negative impact. This is nothing but a popular myth. Truth is that checking your own credit report doesn't affect your rating in any manner. In fact, the same is rather encouraged, as it can help you identify mistakes or discrepancies in your report which can get corrected and improve credit score.
The reason why a credit score check done by yourself doesn't affect your report is because it is considered as a "soft enquiry". On the other hand, when banks or other financial institutions check your report then it is considered as a "hard enquiry", and it does affect your score. This is the reason why you must check your score from time to time, so that you can improve it. When your score is already good then there we be less "hard enquiries", and consequently less damage.
Myth #2: No Credit History Means You Can't Get a Loan
Having a good credit report can be quite helpful when you apply for a loan, and it is true that when you don't one things can become difficult. However, it doesn't mean you can't get a loan at all.
When you don't have a credit history then it is difficult for a lender to evaluate your creditworthiness. However, there are many valid reasons why some people don't have a credit history, and lenders know that. For example, if you are a fresh graduate and have started your first job and applying for a ICICI bank personal loan then it is possible you never had to take a loan before. Similarly, if come from a well-to-do family you may never needed a loan. So, even if you don't have a credit score you can still get a loan if you can give valid reasons for the same.
Myth#3: CIBIL is the Only Credit Bureau of India
While it is true that CIBIL is the most prominent credit bureau of India, and most banks refer to CIBIL reports only, it is not the only bureau of the country. Apart from CIBIL there are a few other major bureaus as well, namely CRIF High Mark, Experian, Equifax, etc.
Myth#4: If You Have a Good Credit Score Getting a Loan is Sure Thing
Having a high credit score is extremely important when it comes to getting loans or credit cards. However, even if you have better than average credit score it doesn't mean that you will necessarily get the loan you are applying for. This is because lenders often check other things as well apart from the score itself. For instance, if you have an inconsistent payment history, delayed payments, or an instance of CIBIL dispute, then your loan application may be rejected. If there are strong negative remarks in your report put by previous lenders, then again the current lender may refuse to sanction a loan.
Myth#5: Credit Reports are Useful for only the Banks and the Financial Institutions
Credit reports help financial institutions to make calculated decisions on loan and credit card approvals. However, individuals can be benefited from their credit reports too. You can track your repayment history, and manage your loans wisely. You can also monitor your report for errors and mistakes, fixing which can improve your score greatly. Apart from this, you can also check for remarks made by banks and other financial institutions to learn about your financial habits, etc. When you can get a free CIBIL report online easily, there is no reason why you shouldn't take its advantage.

So, there were some of the most popular myths that have been misguiding the people. Now that you have learnt about them, you can be more careful with your own credit management. Be sure to keep an eye on your score, and do whatever possible to keep it high. It will help you immensely in the long run.