Revolving credit and its impact

The tide of the future seems likely to carry with it ever increasing waves of revolving credit in the sea of borrower credit extensions. Already revolving credit represents more than a ripple in that sea. The reasons are primarily economic. Think before you spend – if you don’t pay off your monthly bill, the amount can snowball into a pretty big figure as it revolves and gains interest. Here are snippets on the functioning of revolving credit and how it can make you fall into debt traps.
                 

A loan with a difference

Here, you get credit while you go spending or paying bills. You can use the credit limit to purchase anything you desire. Further, you don’t have to pay EMIs or an amount equivalent to that. All you need to pay, to keep your credit card alive, is a minimum amount, which is normally five per cent of the money spent plus interest. Do that and your loan keeps getting revolved in minimum monthly payment cycles.

Unsecured Credit

While an unsecured revolving line does not require collateral. One of the most common unsecured revolving credit lines is a business credit card. Obtaining a business credit card typically requires the business to have a positive credit history and high credit score but does not require an asset to obtain the credit. Another type of revolving credit for a business is an account with suppliers in which you have a set purchasing limit and the company invoices you for purchases. Once you pay the invoice, the amount is available for you to use again.

Understanding revolving credit account

Revolving credit is a type of credit in which the consumer’s balance and minimum monthly payment can fluctuate, and where the cardholder usually has the option of avoiding finance charges by paying the last statement balance within the established ‘grace period’. This type of credit account also has a predetermined credit limit. Credit cards are the most widely used type of revolving credit. Unlike a loan, a revolving account doesn’t automatically close when the account reaches a zero balance. It tends to remain open and available for use until the lender or the consumer chooses to close it.

How it Works

With revolving credit, a bank allows you to continuously borrow money up to a certain credit limit. Every time you buy something on credit, that amount is subtracted from your total credit limit. And every time you pay off your balance, your credit limit goes back up.

The interest rates on credit cards are much higher than that on other loans. At times they can be twice as much. This makes it impossible to repay the bills in minimum monthly pay-outs. A rough calculation suggests that of the minimum payment made every month; only around 1.5 to 2 per cent goes towards repaying the principal amount. The rest goes towards interest payments. So, keep a check on your credit card spending and avoid revolving your credit card balance.

Impact on your credit score

Maintaining a low revolving credit balance has a significant, positive impact on your credit score because your credit utilization ratio is a key factor in your rating. Revolving credit helps in cases where you need to borrow in unpredictable amounts for ongoing projects, education or other needs. The challenge with revolving credit, though, is the temptation to overspend because you have more credit available. Remember, your credit rating is important when you apply for new loans and want to get a good rate. The reason a low revolving balances are important is the perception of lenders. Typically, they assume that if you use a small portion of your available credit, you are in a safe debt position. This makes you seem like less of a risk if they choose to issue new credit to you. Paying down high balances not only helps your score, it puts you in a better position to manage your debt.

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Enhance your home loan eligibility

If you are looking for the right home loan to buy your dream house, keep in mind, loan eligibility concludes whether your loan application will be approved or not and if approved, the amount of loan that is likely to be sanctioned. It is constituted on your credit worthiness, which rely on income and debt repayment capacity. Although a good credit history and a stable income level are the primary sources of your home loan eligibility. You can boost your loan eligibility by following these simple steps:

Combining Incomes: 

As income is a primary norm, you could consider making a joint application while combining the incomes of other family members which will have a positive impact on your repayment capacity. Any other earning family member including spouse, sibling or parent can become a co-applicant for the loan. In such cases, as the clubbed income level would be higher, the loan eligibility would also be higher.

Repaying other outstanding loans:

If you have other outstanding loan liabilities, affects the loan eligibility drastically as the EMIs being paid towards those loans are deducted from the monthly repayment capacity. Lenders can easily find out your existing debt level. As per to enhance your eligibility, it is advisable to reduce your other outstanding loan before applying for a home loan.

Go for step up loan:

Step-up loan take into account the increase in incomes of individual over the period of loan repayment. This type of a home loan has lower EMI in the beginning which is increased in a step wise manner with the borrower’s income over time. In this case, the loan eligibility is calculated on the basis of the possibility of higher income that the current earnings which can increase the amount substantially.

Mutual relationship:

If you enjoy a long-standing relationship with the lender and have a good credit history, you could easily negotiate for a lower interest rate and higher loan eligibility. 

Long tenure:

The eligibility is determined based upon repayment capacity of the applicant on a monthly basis. If you increase the tenure the EMI of loan reduces and hence the applicant can now borrow much amount with the same monthly repayment capacity. However, it will increase the rate of interest levied on a longer duration.

When you attempt to improve the total amount that you are eligible for taking a home loan, it has to be based on actual repayment capacity. While you avail loans, ensure to repay your dues on time as to ignore the debt trap.

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Beware First-time home buyers!

Buying your dream home is a massive investment of one’s lifetime and requires tremendous research about the property, the builder, the policies etc. Taking a home loan is a long term commitment; it becomes crucial that the buyer doesn’t get carried away by lucrative deals and offers. You may end up paying more or getting inefficient service if you choose the wrong scheme or lender for your home loan. There are many mistakes committed by first-time home loan borrowers, which can prove to be destructive for their finances.

Here are the top 5 mistakes committed while taking a home loan:

Avoid selecting your lender first

Most people prefer to go to banks calculate their eligibility as per to know whether their finances will be adequate or not for a loan. Mostly, they are deceived, since the lenders may offer some thriving deals to make money. It’s beneficial to check your eligibility factor online and know easily how much approximate amount of loan you are eligible for.

Borrowing beyond means

Obtaining money more than their income source allows is another misstep which most people make. Banks grant the loan on the basis of your eligibility, income and liabilities, but they don’t scrutinize your existing expenses. However, if your current expenses are immense, despite of that, if you take a loan which results in high EMI payment, you may end up in a bad debt trap. It is always better to lower your budget if your current income and expenses levels are not favourable.

Opting a false loan scheme

In the current economy times, banks are initiating different overwhelming schemes for home loans. Remember, there are some loan schemes in which the rate of interest remains fixed for the initial years and thereafter the loan becomes a floating one, which is linked to the bank’s base rate or prime lending rate. People choosing such schemes should be careful to understand if they have the scope to keep the EMI or tenure changes that will be unveiled when the floating rates kick in, which can be considerably higher! A lack of understanding over a loan scheme or a lack of repaying capacity when higher interest rate kicks in can only result in difficulty in servicing the loan!

Ignoring to review cost

It is always advisable to bargain regarding the interest rates, EMIs, etc. Since, apart from your income and payment structure potential, your negotiation skills will also be considered. And as a prudent loaner, get all the information about the processing fees, legal charges and other hidden costs before deciding on the loan amount.

Neglecting insurance for your home loan

Most borrowers do not recognize this risk, in case, any demise happens to you unfortunately during the tenure of the loan. The home loan that you have taken should not be a burden on your family. By insuring your home loan with a life insurance and a critical illness policy you can benefit your family members with a home and not a home loan. In case of the death of the borrower, the life insurance cover can provide the family with a monetary cover. And for the critical illness policy, if in case the borrower is not able to earn due to any critical illness, this policy will provide financial assistance wherein the interest amounts can be paid.

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Source-secondary

Increase your credit limit by exhibiting

Your credit limit may be raised if you exhibit timely and do full repayments. However, having a high credit limit and multiple lines of credit may hurt a person’s overall credit rating. In these cases, new potential lenders can see that the applicant has access to a large amount of debt, which may lower the chances that this person will be able to repay his or her debts in the future. As a result, new potential lenders might be less likely to offer an additional source of debt.

Information required by lenders

Relying upon the credit increase amount that is requested and the length of time the borrower has held the line of credit, a lender may ask for information directly from the borrower, pull a credit report or use information it already receives from the credit bureaus each month. Such information as employment status, income and housing expenses will be requested of the borrower. The lender may also look at the borrower’s payment history, including whether payments are made on time, how much credit is regularly used and how often the balance is being paid.

What influence your request?

Your request could be affected negatively for a credit increase if you are subjected for making late payments from the previous six months; whereas monthly payments that are a higher percentage of the balance have a favourable effect. The financial institution considers the client total amount of debt; the number of other lines of credit; the number of other requests for credit that have recently been reported to the credit bureau.

Conclusion

In case, your request gets refused then a credit increase may negatively affect your credit score, because the request is reflected in your credit history for a short time. If a request is denied because the current amount of credit is too high, then an increase can be requested again once some of the balance has been paid.

Source: Secondary

Hidden costs disclosed!

While availing the home loan, most of us forget to factor in the hidden costs involved. Customers normally notice these fees or charges once the deal is done and by then, it is too late. These costs can influence the total cost of the product. The benefit of knowing about hidden costs involved is that these vary from one financial entity in the market to another and some institutions may wave these completely, if you negotiate. Let’s take a sneak peek at some of the additional costs that is borne by the borrower but not mentioned to him clearly at the sanctioning of the loan.

Processing Fee: A valid amount of money is charged by all housing finance companies which comprises a processing fee and other administrative charges. The specific amount for this fee differs from one bank to another however, is less for public sector institutions in comparison to private lenders.

Legal Valuation Fee: Before sanctioning the home loan, all housing finance companies carry out a thorough legal verification of the property. The borrower has to bear the charges as legal fees of the lawyer undertaking this kind of verification.

Interest on term before EMI initiate: There lies a certain division between the disbursement of the first loan installment and start of the EMI. During this period, definite interest is imposed by a financier which is termed as the broken period interest.

Prepayment Penalty: If the borrower chooses to prepay the home loan before the tenure gets completed, the bank will charge a prepayment penalty from the borrower. Plus, a service tax is also imposed on the prepayment penalty. But, as per RBI, this clause has been abandoned for floating interest rate home loans

Rescheduling fee: When the interest rate gets altered by the bank or in case the borrower determines to prepay certain portion of the outstanding loan amount. The home loan tenure and EMI structure has to be rescheduled to match the prevailing conditions, the borrower has to borne a rescheduling charge assessed by the bank.

Conversion Charges: The bank charges a certain amount, when a borrower decides to convert the home loan from a fixed rate type to a floating rate type or vice versa. Additionally, a service tax is levied as applicable.

Miscellaneous Fees: The banks may charge the customer several types of miscellaneous fees that are not mentioned earlier. Such fees incorporate charges for obtaining a copy statement of account and copy of original documents that have been submitted by the borrower while availing the loan.

So, ask the financial institution to give you details on the fees and charges involved, read these carefully and then take your decision accordingly.

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Source- Secondary

Secured loan or unsecured?

Every borrower has different financial objectives and priorities in life, and attitudes towards risks. Many consumers often find themselves in a dilemma when it comes to choosing between secured and unsecured loan. However, a lender evaluates a consumer’s credit history before making a loan under either circumstance. Understanding the differences between the two and other characteristics unique to each are mandatory for borrowing money. Want to know – which type of debt is more important for you? Let’s find out…

Secured Debt

Secured debts are tied to an asset that’s considered collateral for the debt. Lenders take on less risk by lending on terms that require an asset held as collateral. As this type of loan carries less risk for the lender, interest rates are usually lower for a secured loan. A prime example of a secured debt is a mortgage, where the lender places a lien, or financial interest, on the property until the loan is repaid in full. If the borrower defaults on the loan, the bank can seize the property and sell it to recoup the funds owed. Lenders often require the asset be maintained or insured under certain specifications to maintain the asset’s value.

Unsecured Debt

With unsecured debts, lenders don’t have rights to any collateral for the debt. Lenders issue funds in an unsecured loan based solely on the borrower’s creditworthiness and promise to repay.  If a borrower fails to repay the loan, the lender can sue the borrower to collect the amount owed, but this can take a great deal of time, and legal fees can add up quickly. Therefore, banks typically charge a higher interest rate on these so-called signature loans. Also, credit score and debt-to-income requirements are usually stricter for these types of loans, and they are only made available to the most credible borrowers. Credit card debt is the most widely-held unsecured debt. Other unsecured debts include student loans and medical bills.

Prioritizing your debts

If you’re strapped for cash and faced with the difficult decision of paying only some bills, the secured debts are typically the best choice. These payments are often harder to catch up with and you stand to lose essential assets – like shelter – if you fall behind on payments.

You might give more priority to unsecured debts if you’re making extra payments to pay off some debt. Unsecured debts sometimes have higher interest rate that makes it expensive to spend a long time paying these off. Even when you’re in debt repayment mode, it’s important to keep up the minimum and installment payments on all your accounts.
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Source: Secondary

Is creditworthiness affected by cosigning of loan?

Being a co-signer to a loan is not at all similar to giving a personal reference….it could have much deeper implications for your financial health. Before you say yes to your close friend or relative, know about the obligations involved.

Before you co-sign

Cosigning for a loan simply means that you are vouching for the fact that the borrower will repay the loan if he or she defaults, you are going to make that repayment yourself! So think about it. No matter how close a friend or relative the borrower is, and no matter how credit worthy you think they are, there is always a chance that they may lose their job or their ability to work or run up against some life-threatening situation that takes them far away, So, only if you have the ability and the inclination to make a repayment on behalf of the borrower, go ahead and sign on the dotted line as a co-signer.

Effect on your credit score

Cosigning for a loan does not affect a credit score unless the other person defaults on the loan and the co-signer does not pay it back. When someone needs a co-signer, it is usually because the person does not have the credit score necessary to get the loan. This means either that the person has been irresponsible with credit in the recent past or that has little to no credit history. Either way, a co-signer is promising responsibility for the debt if the person defaults. If the item is a very high-value item, such as a new car or a house, the co-signer can fall into debt very quickly.

If the original borrower defaults, the lender looks to the co-signer to take over the debt. If the co-signer cannot afford it or does not continue paying the debt for any reason, then the lender will send it to collections just as if the debt was incurred by the co-signer. At that time, the collection agency begins collection activities that can include obtaining a judgement and putting the debt on the co-signer’s credit report, which drastically reduces the co-signer’s credit score and ability to obtain new credit.

If there is a charge-off, collection and judgement, then a co-signer might be looking at up to three new negative accounts on his or her credit report from one defaulted account. For these reasons, it is important to be careful about co-signing on a loan for someone else unless the co-signer knows that the borrower has the ability and willingness to pay the money back.
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Source: Secondary

Check the categories and know debt for better benefits

At one point in our lives, many of us switch to debt as a method for making large purchases that we usually could not afford under normal circumstances. While encountering debt, you should know that there are several forms of debt: revolving debt, unsecured debt, secured debt and mortgages. It’s essential for you to review each category of debt thoroughly as not all debts are created equally and therefore some are considered to yield better benefits than others.

Revolving Debt

Revolving debt is an agreement made between a bank and customer that guarantees a maximum amount that can be loaned to the customer. Along with the commitment fee there are also interest expenses for corporate borrowers and carry forward charges for consumer accounts.  It is usually used for operating purposes, fluctuating each month depending on the customer’s current cash flow needs. Revolving debt can be unsecured, as in the instance of a credit card, or secured, such as on a home equity line of credit.

A line of credit and credit card are examples of revolving debt.

Secured Debt

Assets backing debt are considered security, which means they can be claimed by the lender if default occurs. A credit check is necessary for the bank to judge how responsibly you handle debt, but if you default on repayment, the bank seizes your assets, sells it and uses the proceeds to pay back the debt.

For instance, if you require a loan to purchase a car, the lender supplies you with the cash necessary to purchase it but also places a lien, or claim of ownership, on the vehicle’s title. In the event you fail to make payments to the lender, it can repossess the car and sell it to recoup the funds.

Unsecured Debt

This debt is not backed by an underlying asset. When a bank makes a loan with no asset held as collateral, it does so only on the faith in your ability and promise to repay the loan. It presents a high risk for lenders since they may have to sue to get the money they’re owed if the borrower doesn’t repay the full amount owed. As a result of this high risk, unsecured debt tends to come with a high interest rate.

Some instances of unsecured debt includes credit card debt, medical bills, utility bills and any other type of loan or credit that was extended without a collateral requirement.

Mortgages

Mortgages are the most popular form of debt and largest debt that many consumers confront in their lives. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property free and clear. It typically carries the lowest interest rate of any consumer loan product, and the interest is tax deductible for those who itemize their taxes.
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Source: Secondary

Joining hands worth for bigger loans

Due to the very nature of a home loan, which entails a large sum of money and long repayment tenure, a co-applicant works out to be a relatively significant corpus. Most home loan borrowers find it a daunting thought to imagining the way in which this huge burden of amount could in some way be reduced. Remember, your dear ones can commit you more than emotional support when you decide to go in a home loan..

Every lender grants two or more persons to jointly apply for a home loan. By applying along with a co-applicant, your eligibility increases and you can avail a higher loan amount. However, only people with certain specified relationships like father and son, husband and wife, brothers are authorized to apply as co-applicants. Besides these, other relationships are not allowed as co-applicants. Furthermore, the co-applicant requires having a regular source of income. All co-applicants are not enforced to co-own the property but if there are co-owners in a property then all of them need to be co-applicants. While choosing a co-applicant, confirm that his credit history is good with no loan debts.

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Source: Secondary

Know the variance between credit limit and available credit!

The account balance of a debt plays a prominent key to which the difference between the credit and credit limit is closely tied to. Credit limit is the total amount of credit available to a borrower, including any amount already borrowed.  A borrower’s credit limit may be raised after he or she exhibits timely and full repayments. However, having a high credit limit and multiple lines of credit may hurt a person’s overall credit rating. In these cases, new potential lenders can see that the applicant has access to a large amount of debt, which may lower the chances that this person will be able to repay his or her debts in the future. As a result, new potential lenders might be less likely to offer an additional source of debt. Available credit can be a key factor in a credit score, along with amounts outstanding from various lenders. A reasonable amount of available credit proves that the customer has successfully obtained credit lines in the past, and has the discipline not to use all credit available to him or her. If you try to spend more than your available credit, your transaction will be declined, unless you’ve opted-in to have over-the-limit transactions processed.

Many credit card companies allow borrowers to increase account balances just beyond credit limits, provided that borrowers agree to this in writing. This sometimes is a result of charges and sometimes a result of interest and fees. Most credit card companies charge stiff penalties for accounts with balances above the credit limit, again, provided the borrower agrees to this in writing. In times of need, consumers may be tempted to sign any document that gives them access to needed cash.

The amount is mandated to the credit card companies which they are allowed to charge for credit card accounts over the credit limit. The charge applied may not exceed the amount the account is over the limit. Individuals who have agreed to accept fees for exceeding credit limits have the right to change this at any time by notifying the lender in writing. This does not apply to transactions made before opting out of over-credit-limit fees. Also, the lender is more likely to refuse transactions that take an account over the credit limit after a borrower has opted out.

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Source: Secondary

Prepare to be named and shamed in public, if loan not paid on time!

Banks opt for offbeat tactics to tackle $49 billion of bad debts.

Under pressure to do more to cut a $49 billion mountain of bad debt, India's state-owned banks are reversing years of lax recovery efforts, naming and shaming smaller borrowers and even using big TV screens at shopping malls to advertise seized assets for sale.

India's bad debt pile, dominated by corporate loans, is at its highest in a decade, swollen by an economic slowdown, loose lending and, in many cases, banks' own failure to do enough to chase down rogue debtors.

Now, bank executives say pressure - from a government needing to accelerate economic recovery and from a central bank that wants company owners to take more responsibility - has left little choice but to get tougher and faster.

Tactics include targeting smaller borrowers with aggressive'name and shame' campaigns, with placards and groups of bank employees protesting outside offices, for example, and putting pressure on investors or executives at larger firms.

P.K. Malhotra, a deputy managing director at the State Bank of India, the country's largest bank, said his team received extra training, including in psychology, and was systematically chasing up payments, as others in the bank accelerated sales of seized assets.

"The focus (is) on getting court cases expedited. Less on the paperwork and more on the fieldwork," said Malhotra.

Executives say it's too early to measure overall success,but there have been some wins for India's bruised banks.

Suzlon Energy this year sold its German unit,Senvion, for 1 billion euros ($1.1 billion) in cash - less than what it paid to buy the asset in a deal completed in 2011. It crystallized a huge loss after banks piled pressure on the loss-making wind-turbine maker to cut its debt.

More than two dozen lenders led by SBI are looking for an investor in Electrosteel Steels Ltd, whose near-$ 1.4 billion bank loan is strained. Rather than 'evergreening' the loan - a process of regular review and renew - lenders are getting involved in the buyer talks, an individual with direct knowledge of the matter told Reuters.

EARLY WARNINGS
Gross bad loans at Indian banks rose to 3.1 trillion rupees ($48.83 billion) as of end-March, or 4.6% of total loans, according to central bank data. Including loans that are stressed but not yet classified as bad, total troubled loans made up 11% of total lending.

Banks say they are now moving faster to bring that down,stepping in at the first sign of trouble, sending out more officers to chase borrowers and putting more people on the job through specialized branches. Some are trying to speed up the sale of seized assets by advertising them on large screens at shopping malls.

"These days people are getting on to the job the moment you have an early warning signal that something may happen in a company and you have thousands of crores at stake," said a senior banker at a big state-run bank.

India uses crore to denote a unit of 10 million.

SBI has set up branches focused solely on recovering loans, and, to speed up cumbersome paperwork, encourages managers to snap pictures of themselves on seized assets - proof of the change of ownership. It plans to set up a web portal to showcase all the seized assets available for auction.

"Companies can sometimes fall in love with their assets, but bankers can't afford to do that," said SBI's Malhotra.

Union Bank of India Chairman Arun Tiwari said his state-run lender has changed its system to put three separate general managers in charge of recovering different classes of loans - large, middle and small.

"You have to go out in the field," he said.

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Source: Secondary

Error in report? May fall in disputes!

The business of reporting consumer credit is highly regulated. Your Credit Information Report (CIR) plays a large part in the loan application process. Hence, any discrepancy in your CIR may result in reduced chances of a loan approval. Therefore, it is important that the information on your CIR is accurate and updated. You have the legal right to obtain a free copy of your credit report from any of the major credit bureaus once a year, which is a right you should certainly exercise. If you find information that is incorrect, you need to understand which errors you can dispute, along with how to report them.

Your credit report holds information about which companies have granted you credit, how you have managed your loan obligations and who has performed an inquiry into your profile. The only way to spot incorrect information is to review your credit history yourself.

Errors commonly arise for two reasons:

1. Creditor makes a mistake when supplying information to the credit bureaus,
2. Or the bureaus do not correctly compile your otherwise disbursed information from their databases whenever your credit report is requested.

Commonly, these errors result from mistaken addresses, mistyped social security numbers or confusion between similarly named borrowers or relatives.

Disputed fields in your report

Common areas of dispute include listed debts that are not yours, debts that are yours that are not listed on the credit report, debts that reflect an incorrect or incomplete payment history, debts that should have been removed from the credit report due to age and are still listed on your report, and inquiries from lenders that you did not authorize to pull your report.

Resolving the mistakes

The easiest way to fix a mistake is to approach the original creditor that sent the information to the bureau. The creditor is legally required to transmit a correction when it knows that it has made a reporting error, which can save you some unnecessary paperwork. A dispute request can be raised based on either a CIR purchased by you directly from CIBIL or a CIR accessed by the Credit Institution (CI) with whom you have applied for a loan to maintain your federally protected rights, but this is still a faster solution.

The CIBIL is a wonderful resource if you are considering disputing an item. It can help you figure out which items can be disputed and what kind of documentation or other proof you need, and it can supply advice on how to proceed. The investigation is normally completed within 30 days. It is possible that your dispute may not result in a corrected report right away.

 Source- Secondary

Borrower Data Under One Roof- Equifax

Equifax India, a credit information solutions and analytics company, has introduced a software product called BureauOne to simplify the money lending process.

Custom-created for India, BureauOne collates various credit bureau responses and serves as an intelligent router that connects the lender's loan processing systems directly with all the major credit bureaus operating in the country.

Using this tool, lenders can easily submit one inquiry to BureauOne, and the product will send back a result of reports from all of the bureaux connected to it, giving customers the ability to improve the credit appraisal process more efficiently.

Simply put, this means lenders need not seek data of borrowers from multiple agencies.
                 

Shahid Charania, managing director of emerging markets, Equifax, said, "This multi-bureau solution will reduce operational costs for our customers. The solution was built for India and is customisable through all phases of development and deployment to ensure that it is exactly the kind of product that meets our customer requirements."

The solution empowers lenders and businesses to make better underwriting decisions in the most cost effective and timely manner while also eliminating duplicate efforts to input and retrieve consumer information, it said. The solution also comes with a rules engine that can be configured to send the same enquiry to multiple bureaus based on responses received from the first bureau, leaving little room for human error.

At present, BureauOne is being used by some of the leading players belonging to the public and private sectors and the NBFC segment.

"The BureauOne solution is helping us in implementing our multi-bureau strategy," said Rajiv Sabharwal, executive director, ICICI Bank. "With the advent of multiple bureaux in the country, it is imperative for us to develop capability to use the data being provided by them. BureauOne allows us to do that without creating any operational strain on our resources."
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Source: Secondary

Direct benefits of credit scoring

Credit scoring plays a crucial role in creating these credit opportunities, driving credit penetration and eventually percolation of benefits for the consumers.

Credit plays an important role in shaping the economic and social dynamics of the society. Remember the shrewd moneylender from old Hindi films, who charged enormous and never ending interest on capital, leading to deteriorating financial status for the borrower. Today, thanks to institutionalised credit, we have structured and regulated credit opportunities available for building assets, educating our children and aspiring for economic as well as social growth.

Credit scoring plays a crucial role in creating these credit opportunities, driving credit penetration and eventually percolation of benefits for the consumers.

The basic principle of institutional lending is trust. A lending institution provides credit to a borrower on a mutual understanding that the borrower will repay the sum, along with reasonable interest, through periodic instalments, over a decided period of time. The lender may not know the borrower personally, but will decide to grant credit on the basis of the borrower’s existing income and past repayment record provided by the credit bureau. The interest collected on these repayments serves as the capital for fresh lending to yet another deserving borrower who needs this money for his own growth aspirations. On the other hand, if the borrower defaults on the repayment of the loan, the credit grantor will face losses and will not be able to sustain capital for fresh lending for many more aspiring and deserving consumers.

This is where credit scoring steps in. Credit scores provide the credit grantor the ability to predict the “likelihood of repayment” by the borrower. Simply put, credit scores help the credit grantors to minimise risk of losses due to defaults and ensure profitability for fresh lending. Credit scores enable the lender to infer the risk profile of the borrower so that some “bad borrowers” (high credit risk) are not mistaken as “good borrowers” (low credit risk) and provided credit. This will result in a loss for the lending institution and in turn loss of the much needed credit opportunity for another creditworthy consumer. In simple terms, credit scoring enables lending institutions to create sustainable credit opportunities for deserving borrowers to allow them to build assets for financial growth.
           

But does credit scoring directly benefit consumers? It does.

Here’s how:

Speedier access to credit: When a consumer applies for credit, lenders use the credit score to make faster, more consistent decisions, thereby eliminating much of the risk of human error and subjectivity. Most leading lending institutions in India are already using the CIBIL TransUnion Score for making credit related decisions. Even significant lending decisions can now be made in a matter of hours or minutes rather than days or weeks with credit scoring. This enables faster processing of loan applications and thereby speedier access to credit for consumers.

Availability of affordable credit at better terms: In addition to both speed and convenience, credit scoring may also make credit cheaper, which means lower costs to consumers. Without objective credit scores, lenders may set prices in a subjective manner, resulting in credit products that are expensive for low-risk consumers and inexpensive for high-risk consumers. By reducing the costs of extending credit, credit scoring may enable lenders to give credit to more customers and at overall lower costs.

Credit scoring expands access to credit and drives sustainable credit penetration. It improves loan performance by reducing delinquency rates and containing NPAs. Credit penetration is achieved by significantly identifying ‘good borrowers’ (low credit risk) that otherwise would have been misidentified as ‘bad borrowers’ (high credit risks) and, therefore, would have been denied credit. At the same time, bad risks now have credit denied to them or are no longer subsidised by lower-risk individuals. In the aggregate, lending is increased, leading to greater economic growth, rising productivity and in turn greater financial inclusion.

Visit: www.cibilconsultants.com
Source: Secondary

CIBIL: Banks are lending wider and smarter

NAGPUR: After being tight-fisted following the slowdown of 2008, banks have once again begun actively lending on retail front, doling out personal loans and new credit cards, says a survey by Credit Information Bureau(India) Ltd (CIBIL). Since 2010, retail lending has jumped 150%. As many as 63% of the new borrowers are people below 35 years of age, says CIBIL data.

CIBIL has also made a state-wise comparison of age profile of borrowers. This shows Maharashtra has 21% of borrowers below the age of 26 years and 42% between 26 and 35 years, which is the highest number of young borrowers. The national average is 11% and 38% in these age categories respectively. Borrowers above 60 years make just 5% nationally.

CIBIL maintains the borrowers' repayment details which is referred to by the banks while processing loan cases. If a borrower had delayed payment or defaulted on any of the loans, a different bank processing his case can know this by referring to the CIBIL data.

Another comparison of 2008 with 2013 data shows the banks have preferred giving retail loans to only consumers with better credit record. CIBIL awards points to indicate the credit worthiness which has been taken as the parameter in the comparison. However, CIBIL has compared data related to 2008 and 2013 only and not for intervening years.

"Those having 700 points and above out of a total 900 are in the best category. Below 700 leads towards the doubtful to worse categories," said Harashala Chandorkar, senior vice-president of CIBIL. She was in the city to hold a meeting as a part of CIBIL's awareness drive.

            

In 2008, the loans granted to borrowers with a score over 800 were 26% of total retail lending. But in 2013, it went up to 62%. Those with a score between 750 to 799, made 57% of total borrowers in 2008 and it came down to 24.8% in 2013. At the same time, the worst category of less than 550 points formed 6.1% of the retail loans in 2008, which further came down to 2.5% in 2013.

A borrower can have access to his CIBIL score. Though repayment of loan in time is the only measure of awarding the points, the exact method of evaluation is not shared by CIBIL.
Visit- www.cibilconsultants.com
Source: Secondary

Secured Credit Cards and Your Score

Secured Credit Card is a Blessing in Disguise. Because Life is unforgiving and so as Poor CIBIL Score / Credit Score. Once an individual is in this sad situation, it is very difficult to come out. A borrower is at the mercy of a lender for CIBIL Score. There is no place for human emotions in the mortgage industry. In many cases, it is observed that there was “No” intent of a borrower to default on payment. Such a default is also known as non-willful default. The irony is that both willful and non-willful defaulters are being beaten with same the stick. In case of non-willful default, the intention of a borrower is to clear the dues but he just need a little support to put his financials back on track. Banks and financial institutions treat him like a criminal. In such cases, CIBIL Score can be easily spoiled but it may take years to repair the CIBIL Score. You spent years to build, but it can be destroyed within few months. It's not like that only because of a bank but customer is also equally responsible.

We cannot blame or fix 100% responsibility of the banks. As a borrower, we should follow credit discipline and plan for unforeseen circumstances in life. Still it is not possible to foresee every unforeseen circumstance. As it is mentioned that banks should be a bit lenient towards the non-willful defaulters. There should be completely different CIBIL reporting mechanisms for non-willful defaulters provided bank is convinced about the same. At the end of the day, too strict credit regime will decrease no of potential borrowers in the system which will impact the business of the banks in the long run. More and more entry barriers will reduce no of potential borrowers. Too much compliance’s are not good for any industry or sector. It kills the sector as such or it may lead to a scenario when almost everyone start flouting the rules. Best example, is of  Value Added Services offered on Mobile. Too many compliance’s / entry barriers killed this golden hen. A person subscribed to financial news and stock alert but then stopped using due to double opt in etc. Thankfully, mobile apps replaced the SMS service. The second example is of Wealth Tax, due to too rigid compliance, non-compliance was common. Too strict compliance on credit approval process will kill the concept of credit, it is not good for both banks / financial institutions and growth of the economy. Non-willful defaulters should be treated separately and 2nd chance should be given to the defaulters to repair the CIBIL Score. Currently, there are not many options to repair CIBIL Score except Secured Credit Card and few others.

Secured Credit Cards – Fact Sheet

Secured Credit Card is best suited to repair the CIBIL Score. Secured Credit Card can be correlated to Home Loan. As Home Loan is backed by Collateral i.e. Property is Mortgaged similarly Secured Credit Card is backed by Fixed Deposit. One of the misconceptions is that good CIBIL score is required to avail Secured Credit Card. It is not true as Secured Credit Card is backed by security like Fixed Deposit therefore banks don’t check CIBIL Score before they issue Secured Credit Card. In other words, we can say that Fixed Deposit Amount is mortgaged to the banks, therefore, there is no need to check Credit History. Moreover, the risk is very less compared to Home Loan which is high value purchase. Secured Credit Card is also known as Credit Builder by some of the banks. It’s a win-win situation for both banks and the individual. Banks get double business i.e. Fixed Deposit and credit card whereas an individual can build a good credit score. Functionality wise it is as good as Debit Card only i.e. you can only use the money available in your account.

Banks offering Secured Credit Card: ICICI Bank, Axis Bank, SBI Dena Bank etc. SBI Dena Bank card is issued against Fixed Deposit in Dena Bank.

Fixed Deposit Amount: Most of the banks define minimum fixed deposit amount before they issue Secured Credit Card. This amount is Rs 30,000 for SBI Dena Bank Card whereas ICICI bank issue Secured Credit Card with min FD value of Rs 20,000.

Credit Card Limit: Credit limit of Secured Credit Card also vary from bank to bank. ICICI bank offer max credit limit i.e. 85% of Fixed Deposit Value as a Credit limit. Lowest is 50%.

Fixed Deposit Interest Rate: Bank offers interest rate as offered to regular fixed deposits.

Fixed Deposit Tenure: Vary from bank to bank but normally it is 2 years. ICICI bank offers minimum tenure of 6 months

Liquidity of Fixed Deposit: Bank will put a lien on the Fixed Deposit linked to Secured Credit Card. In short, you cannot withdraw Fixed Deposit. In case of a default in payment on Secured Credit Card, Bank will liquidate the fixed deposit to recover the amount due.

Charges: Banks charge joining fees, annual fees, processing etc to issue Secured Credit Card. Please compare the charges before finalizing.

Documentation: For Secured Credit Card, minimum documentation is required. Banks need only identify proof. Income Proof is not required. If you have existing relation with the bank then no documentation is required.

Important Points

1. No Credit History: Not many people are aware that besides CIBIL Score repair, Secured Credit Card can be used to build credit history from scratch. In many cases, loan of a potential borrower is rejected because there is no credit history. In case of “No Credit History”, CIBIL Score will showNA or NH. Banks inform the customer that CIBIL Score is low, but it is not the case. It’s an irony that no one lends, an individual cannot build credit history till someone lend. Therefore, Secured Credit Card will come to your rescue.

2. Use and Pay on Time: Once you get Secured Credit Card, make a point to use it on the regular basis. Most importantly, make all payments on time. Any default on payment can further damage your CIBIL Score. Always make a point to utilize max 30% of credit limit else it shows credit hungry behavior. For example, if your Fixed Deposit is of Rs 1,00,000 and Credit Limit is 85% i.e. Rs 85,000. In this case, never utilize credit card for more than Rs 25,500 i.e. don’t spend more than this amount through credit card

3. Secured Credit Card should be reported to CIBIL: In many cases, it is observed that banks don’t report the Secured Credit Card to CIBIL database. A person was using this card for more than a year. After 1 year, he realized that it was not reported to CIBIL. Therefore, it is mandatory to check your CIBIL report after 60 days from the date Secured Credit Card is issued. If the details are not reported to CIBIL then you can request the bank to report the same. If it is not reported to CIBIL then whole objective behind Secured Credit Card is defeated.

 4. Don’t expect overnight results: Don’t expect overnight results. A good credit behavior followed for 18 months to 24 months will yield the results. Reason being, CIBIL reports the credit behavior which has to be established.
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Source-secondary                          

How to read CIBIL Score and Risk Index?

How to read CIBIL Score and Risk Index is one of the most common query. In layman terms CIBIL Score is nothing but risk assessment / credit worthiness of a potential borrower based on past credit history. Though CIBIL Score and Risk Index is the 1st level shortlisting criterion by the Mortgage Lender. Executives of financial institutions who have access to this data are not competent enough to explain the CIBIL Score / risk index to borrowers. It create panic situation among borrowers. 

How to read CIBIL Score and Risk Index?

CIBIL basically divide all Individuals / potential borrowers into following 3 categories. We will understand CIBIL Score / Risk Index in each category separately.

(a)  Individuals with either No Credit History or Credit History not reported to CIBIL.

(b) Individuals with less than 6 months Credit History

(c) Individuals with more than 6 months Credit History in last 2 years

CIBIL Score / Risk Index returned for each of the above mentioned category of potential borrowers is different. Lets check out how to read

(a)  Individuals with either No Credit History or Credit History not reported to CIBIL:

In this category, the index returned is either NA (Not Available)or NH (No History). What it implies is that individual has No credit history and / or Credit History is not reported to CIBIL by the financial institution. NA or NH cannot be classified as low score or poor credit history. It simply means there is no credit activity registered or reported. Now one whose CIBIL index was NA, asks NA or NH is not viewed negatively by the financial institution then why her Home Loan was rejected. Answer is very simple, some financial institutions have policy not to lend with NA or NH index. In short, in the absence of risk index / CIBIL Score financial institution has no criterion to check risk assessment.

(b) Individuals with less than 6 months Credit History

In this category, CIBIL return Risk Index between 1 to 5 therefore as i explained in above mentioned example that 2 is not a CIBIL Score but risk index of the potential borrower. Lets check how to read Risk index between 1 to 5

High Risk: Index of 1 and 2

Medium Risk: Index of 3

Low Risk: Index of 4 and 5

In some cases, the loan was rejected because of high risk index of 2. To maintain good CIBIL score, it is advisable to follow good credit practices from the beginning. It is observed that most of the Low CIBIL Score cases handled by me were outcome of ignorance of a borrower initially. It is always advocated that banks should appoint qualified Credit Counselors instead of executives with not even bare operational knowledge.

                                           

(c) Individuals with more than 6 months Credit History in last 2 years

In this category CIBIL Score is returned i.e. value between 300 to 900. Higher the CIBIL score, lower the risk and vice versa.  High credit score does not guarantee sure shot loan / mortgage. CIBIL Score depend on 70 parameters to arrive at your CIBIL Score. It is critical to find out parameters which are impacting CIBIL Score negatively. CIBIL Score can be linked to credit worthiness of an individual. Lets check credit worthiness

Score between 300 to 600: Very Poor

Score between 600 to 700: OK

Score between 700 to 775: Good

Score of more than 775: Marvelous

Normally people have tendency to compare CIBIL Score / Risk Index. 

One of the most common casualty is Secured Credit Card. In most of the cases, secured credit card details are not reported to CIBIL by the banks. It defeats the whole purpose behind secured credit card. Most of the people opt for this credit card to improve their CIBIL Score or Risk Index. If it is not reported then you should immediately bring it to the notice of a bank.

Lastly, as it is always request that before applying for any loan or mortgage one should check your CIBIL Score / Risk Index to avoid any future shocks. You can take all corrective steps to improve your CIBIL Score / Risk Index in advance. Its a misconception that your CIBIL score is impacted if you check your CIBIL Score. Fact of the matter is that you can check your CIBIL Score as many times as you can. It will not impact your CIBIL score negatively. You can pull out your CIBIL Report online. Click Here to get your online CIBIL Report.

To summarize, It is always advisable to understand the CIBIL Report before arriving at any conclusion. If your loan is rejected you have right to know the reason for rejection. Blanket answer from financial institutions that “Your CIBIL Score is LOW” should be supported by logical reasoning. High Risk Index is not the end of the road. You can always improve your CIBIL Score with good credit practices.

Visit - www.cibilconsultants.com

Source: Secondary