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.

Wednesday, 11 January 2017

Ways to clear holiday debts

Holidays are fun time! They are an opportunity to spend time with family, unwind and explore new places. Lots of times holidays can coincide with festivals which can double the joy and fun but also double the expenditure. India is a country with myriad festivals and the last quarter of the year is packed with them. So we have Durga Puja, Diwali, Thanksgiving, Christmas and of course the perfect end with the winter vacations and the New Year Celebrations in the last three months of the year. So while trying to juggle the fun, expectations of the family and the finances we can find ourselves face to face with holiday debt.
How to Clear Holiday Debts?
If one has not budgeted well or gives in to sudden temptations or some plan go awry we may be forced to spend more than we intended on the credit card. So even if it is a relatively low interest credit cards (I say relatively low because all credit cards charge exorbitant interest rates on payment delays or overdue amounts) you still can have piled up debt that requires immediate action.   
Ø  Accept the Problem:
Living in denial will not help. So the first step to resolve the issue is to accept it. Rather than waiting for the situation to become bad it is better to be pre-emptive and take remedial action as soon as you realize that you have spent more than you intended to or budgeted for the holidays. A high credit card bill (higher than what usually it is), exceeding the credit limit, resorting to borrowing are all signs of trouble. So it makes sense to be prompt in action than wait for a situation where the credit score is impacted and you are burdened with high interest costs. Missed payment, high credit utilization ratio etc impact CIBIL score calculation.
Ø  Make a Plan:
Once you know that things are not as smooth as they should be it is time to get a plan in place. So get a plan ready; identify what are the problems areas and figure out a practical yet effective plan. The plan should be workable even if it takes a while to reach the goal. No point having an ambitious plan if it is not practical. If the debts are too high then do not make a plan that involves repaying the debt at the earliest yet in a feasible way. A good way would be to pay minimum amount due on all cards even if you are unable to pay the entire amount immediately. This will save you from being a defaulter and also the penalty charge for non-payment though charges on overdue would still apply. 
Ø  Start With the Highest Interest Debt:
The biggest problem with holiday debt apart from the fact that is a mental burden is the financial burden it poses due to the interest that is piled on the unpaid amount. Credit cards are one of the most expensive debts and if you have taken a personal loan for footing the bill for your holiday expenditure then remember those are also pretty expensive. In such a scenario one must start with the debt that has the highest interest cost for obvious reasons and then go on the next most expensive and so on. Of course if you figure out a way to pay all the debt nothing like it but if you are unable to do so then pay the most expensive debt first.  
Ø  Don’t Pile on More Debt:
When trying to repay your debt there is no point trying to pile on more debt. Often credit cards are used to pay monthly bills and dues; this might be unavoidable in certain circumstances. However if one has the option then one must refrain from using credit card for these payment too and pay from the regular bank account or cash. Needless to say buying unnecessary things, shopping and being indulgent should be avoided; where ever possible defer non-essential expenditure.
Ø  Look for Options:
There is no single way to repay holiday debt and no best way. There might be multiple options that can be used to overcome this situation and one or more can be used depending on individual’s preference and choice. One could opt for balance transfer option where the unpaid balances are transferred from a credit card which charges higher interest to a card which charges a lower interest rate.  This will help you save some interest cost. You could also talk to the existing card company to convert your dues to EMIs. There is option of dipping into personal savings, using a fixed deposit or some other way to pay these dues. However any option must be used after carefully evaluating its benefits and losses.


Hopefully you do not have any holiday debt piled up but if you have the above discussion can help you get out of it. 

Friday, 6 January 2017

You can improve your credit score using credit card

Credit cards are useful; well almost a necessity for some of us now. However what if we told that a credit card could help you improve your credit score. Though it may sound surprising but it is true. A credit card if used in the right way can not only help you create and maintain a healthy credit trail but can also help in improving the existing score of an individual. As we know that credit score is important as it reflects the financial robustness and credit worthiness of an individual. So if you want to improve your credit score we have just the right ideas for you.
Use your Credit Card Responsibly:
Phrases “using your credit card” and “using your credit card responsibly” are differentiated not just by a word. This word could change a lot for your credit score. When you use your credit card responsibly your CIBIL Rating will improve. The key to being a responsible user is:
ü  Keep a Low Credit Utilization Ratio: Credit utilization ratio is the proportion of your average card spending to the sanctioned limit for your card. This ratio is considered per card wise as well for all cards put together if one has more than one card. Often one might wonder if they are able to pay on time then how does it matter how much of their sanctioned limit they utilize. However this is not the case; even if one does pay the entire amount a high credit utilization ratio reflects a credit hungry behavior on the part of the user. Apart from that high credit utilization is also an indicator of high default potential by the card holder in case of loss of regular stream of income.
ü  Pay on Time: This of course is the simplest thing and needs no explanation but we will still mention about it briefly. Paying on time is the best thing you can do for your credit score. Payment history is the biggest contributor to the CIBIL score calculation and can impact it to a great extent.
ü  Keep Old Cards: Another thing you can do to better the credit score with the help of credit cards is to keep old cards especially if you have a good track record of paying on time and keeping a low utilization ratio. A deeper credit trail gives a more accurate picture about a person’s credit behavior.
A Credit Card Could Help You Create a Credit Trail:
Absence of any type of credit will not lead to a good credit score as it does not give any idea to the prospective lender about how you will treat your debt. Thus if you have a credit card but are averse to using it we have a revelation for you. Using a credit card is the best way to create a credit history; one would not want to take a loan for it. Thus use your card carefully regularly, pay on time and do not go overboard with it. This will give you a stable credit trail.
A Secured Credit Card Could Help You:
A secured credit card can come as a life saver for somebody who has a low credit score and is unable to get a credit card for this reason. Any new loan or credit card is issued based on the credit trail one has; the lender accesses the applicant’s Credit Information Report (CIR) commonly known as CIBIL report. Based on the CIR they will then decide whether to issue a card or sanction a loan to the person. If the CIR does not give a healthy picture the application is likely to be rejected. In such a situation the applicant could try and get a secured credit card. A secured card is a card that is issued against a deposit that a person holds with the bank. Depending on the card issuer’s rule the credit limit could be 60% to 70% of the deposit value. Rest of the basics of credit card usage remains same. Thus the card issuer remains assured that in case of a default they have the deposit to fall back upon and their funds are safe.
Thus a secured credit can help not only loan defaulters but also those who have no credit trail. No credit trail means that there is no credit score too; thus getting a card without a credit score could be a challenge. However, not so if the applicant applies for a secured credit card.  Here the issuer has collateral in the form of the deposit so they would be willing to issue a credit card. Thus a secured credit offers a solution to loan defaulters and those with no credit history.
As we said earlier the credit card offers not only convenience but also a simple way to improve one’s credit score; hopefully the above ideas can help you do so.



Thursday, 29 December 2016

Top Reasons for Credit Card Rejection

Getting your credit card application rejected can be troublesome and as well as confusing. It can be troublesome because you may want a credit card for a particular reason like travelling abroad or for a bigger credit limit and confusing because you may wonder what caused your card application to be rejected. Credit cards offer great convenience and ease but just like a loan is offered based on certain parameters and guidelines laid down by the financial institutions the same applies to credit cards. A credit card will be issued if the applicant meets the eligibility set by the credit card company else (as expected) the credit card application would be rejected. There are multiple reasons for a credit card being rejected and we look at few here.
Ø  A Poor Credit History: This is one of the most common reasons for rejection of an application. Getting credit cards for people with bad credit score can be a challenge. Any card issuer would look at the credit report of the applicant to assess his/her creditworthiness and judge if the applicant is a trustworthy candidate. Somebody who has defaulted in past, is late in making payments etc is likely to do so and the credit card company is less likely to trust him/her and their application is likely to be rejected.
Ø  Too Many Credit Cards: There is no number fixed by card issuers to define as too many cards. However if the card issuer finds out from your CIR that you already have too many cards issued in your name they may reject the application.  Too many cards reveal overdependence on credit, credit hungry behavior and the also there is high likelihood of default in case of temporary loss of income and the person falling in a debt trap. A card issuer may consider it to be risky credit behavior.
Ø  Not Meeting the Eligibility Criteria: Not meeting the eligibility criteria set by the bank is also one of the causes of an application being rejected. The eligibility criteria could be related to the income level, job duration, credit score etc. Thus before applying for a card an applicant should check the eligibility criteria set by the card issuer and also make a free CIBIL check online to ensure that chances of the application being rejected are minimal.
Ø  Not Filling the Card Application Properly: While this may appear like a silly reason and one may kick themselves if the application is rejected due to this reason but it is also a probable cause. Often card applications are long and may require a lot of information and signatures. Oversight, impatience or lack of requisite knowledge can cause improper filling of forms which can result in an application being rejected. Not signing properly or using different signatures at different places could also cause problem. While this is something that can be remedied by filling in the form again correctly but may involve loss of time and delay in getting a card issued.
Ø  There is Charge-off in Your Credit Report:
If there is a noting in your CIR which states that there was a credit card balance in the past which was not paid then it could spell trouble. Any credit card company is not likely to trust you; if you defaulted on credit card balances in the past then what is to say that it won’t happen again. In such a scenario getting a card could obviously be tough.
Ø  Already High Debt Burden: Even if you are paying your dues on time and comply with the other eligibility criteria set by the card company your card application could be still denied. This could be due to a high debt burden. If the card issuer feels that your debt to income ratio is high; meaning you have a high debt burden in comparison to your monthly income they can deny you a card. Additional debt in the form of a card could put you at risk of default. This is calculated putting your credit card balances and loan dues together as against your income.
Ø  Your Address Could be to Blame: Unlike in the past where most of us spent our entire lives living in the same house or even city this does not happen anymore. Due to job compulsions and the quest for better opportunities and lifestyle people often keep moving. Sometimes inadvertently you may land up at an address which is on a defaulter’s list and you may be unaware of this. Thus in such a situation you can bear the brunt without any fault of yours.

Hopefully the above discussion can help smoothen your process of getting a card issued and there is less likelihood of a card application being rejected. Credit card applications involve the card issuer asking for your CIR which is generates a hard enquiry and impacts the credit rating.