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.
Visit- www.cibilconsultants.com

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Low Value Loan and CIBIL Score

Loan in any form is not good for financial health of an individual specially low value loan. Don’t believe in Good Loan or Bad Loan, it should be avoided (If possible). Rather believe in credit discipline and good credit practices to improve CIBIL score. For an asset like property, an individual cannot be save such a huge amount to buy property without home loan. Barring few exceptions i.e. high value assets, we can manage our finances to avoid low value loan/ borrowing. A Loan should be availed if following 2 conditions are fulfilled:

(a) Purchase / Buy should be an Asset: An Asset is basically a belonging which should be appreciating in nature and adds value to the wealth of an individual. By this definition, Property is an asset whereas loans like vehicle loan, personal loan for foreign holidays, consumer loan for white goods etc are not assets. Any kind of consumer or personal loan for non assets is not advisable. Lets take example of a car, If one bought a car of 5 lakh through Car Loan then it doesn’t make sense. Considering Interest rate of 14%, cost of car along with interest will be approx 6 lakh plus. As car is a depreciating asset and there is a famous saying in North India that value of car is half as soon as it comes out of showroom. Therefore it doesn’t make sense to avail vehicle loan for depreciating asset like Car, Bike etc.

(b) Value of Purchase: Any low value loan shows credit hungry behavior of a buyer which is true for vehicle / consumer / personal loan.  Though mortgage of car / bike is secured loan but point is to make is low value loan. Low value loan impacts CIBIL score negatively. You should avail loan only for high value purchase like Property. Though people avail personal loan for foreign holidays which is also High value purchase but its not an asset there, same is not suggested.

Low value loan has no correlation with the income level of an individual. As example, man who earns Rs 2 lakh per month but his savings are actually NIL whereas someone with a salary of 1 lakh can save Rs 30,000 per month easily.  Its a wrong notion that with high income, if you avail low value loan then it will not impact your CIBIL Score. Infact its other way round, if one's income reported in CIBIL database is Rs 1,50,000 per month and he avail low value loan of Rs 50,000. At micro level, Its show how pathetic he is in managing his finances and poor state of my savings level.

On the other hand, an individual with salary of Rs 30,000 per month availing low value loan of Rs 50,000 can be justified but it has its own problem. The repayment capacity of person with low income is low therefore probability of default is very high. Low income group lives under hand to mouth situation. Any unexpected expenditure disturbs the monthly budget and Axe falls on EMI of low value loan. In short, its a double edged sword. Any wrong move may permanently close the doors of availing future credit from financial institutions.

As we observed that in both the cases i.e. high income and low income, low value loan impacts CIBIL score negatively. In few cases, it is observed that people opt for low value loan just to avail some scheme at the time of purchase. In one of the case,  Ms. X bought washing machine through consumer loan. She is well off but retailer was offering free mixer grinder if purchase was through consumer loan. We should avoid such temptations and strictly follow financial & credit discipline. Any such adventure can impact our CIBIL score.

How to Avoid Low Value Loan?

This post is not conveying that we should not buy vehicle, white goods like washing machine or should not plan foreign holiday etc. We should plan all such purchases but there is a small change in the plan. Mode of payment should shift from Postpaid to Prepaid.  In short, instead of availing low value loan for such purchases, we should save for these low value purchases in advance so that it will not impact our CIBIL negatively. Recurring Deposit is one such blessing in disguise which can help us in short term savings to plan low value purchase. Only catch is that we have to plan in advance. Suppose, one person is planning to buy a new refrigerator or Bike during this year at the time of Diwali. Instead of availing low value loan at that time,he can plan now as he have some time to save. He checked and found that on-road price of a bike is Rs 38000 therefore he set a target of Rs 42,000 in 9 months to adjust any price change. He will open recurring deposit of Rs 4,500 per month for next 9 months at 8.25% interest rate. On maturity, He will receive Rs 41, 908 thus will avoid low value loan at the time of purchase. This approach will have triple advantage:

(i) It will not impact his CIBIL Score

(ii) He will not bear the interest cost which is another savings for him i.e. icing on the cake.

(iii) Last but not the least, he avoided low value loan through intelligent savings

You can check return from Recurring Deposit through Recurring Deposit Calculator.

To summarize, borrowers should avoid low value loan as it may impact CIBIL score negatively. It shows credit hungry behaviour and financial un-stability. Loan should be availed only for big ticket purchase which classify as an asset and add long term value to the financial portfolio of the borrower.
Visit- www.cibilconsultants.com

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Get loan with almost NO or bad Credit score?

An individual with low or no credit score has a hard time getting a loan as they are looked upon as a lending risk that may default and leave the lender in losses. People with no credit find themselves into a muddle state since, banks refuse to give them credit as they have no credit history and they need credit to build themselves a credit history. So what do you do in such situations? How do you get credit to build your credit history:

Be ready to pay a deposit: 
Understand that you do have a bad credit score and you’ll be needing to pay a deposit to get a card or loan. Many people shy away from secured cards as they have to pay a deposit against it. But remember that, a secured card is the best way to improve your credit score, as in almost all cases you’ll be denied a card or loan with bad credit. So, this is the easiest of all to build your credit score quickly and then apply and get accepted for better loans.

Also, make sure you apply for a secured card which reports your on-time payments to the credit bureaus. Some cards do not do so, and all your efforts of being credit responsible will go to waste as your good habits aren't reported to your credit report and there will be no difference to your credit score.

Credit builder Loan: 
This is something similar to a secured card but in the form of a loan. Here, the bank will lend you a small loan for an object you needed to buy. The object is being held by the bank while you make monthly payments to the bank and the possession is given back to you when you pay off the whole loan. This not only gets you the object which you wanted to buy but also helps you build a good credit record.

Avoid Multiple credit applications:
In all these though, you need to avoid applying for multiple credit lines. Applying for multiple credit lines  at the same time does more damage than help. Multiple credit applications leads to several hard inquiries against your credit report which lowers your credit score. So be slow, research well and be selective about the credit you apply for. It is very dangerous for people with no credit as they look as an individual having no credit to bursting into the credit scene which can be bad for their credit health. Don’t waste your time on credit cards or loans which require excellent credit- it is a waste of time as well as a dent in your score due to the multiple inquiries.

Discuss with lenders:
Talk to your lenders before you apply for a loan. Some lenders have services wherein they can pull out your data, which may be not be included in your credit score but may show your repayment patterns and credit worth. Though, it is not included in your credit score, but the lenders may be willing to take a risk and give you a loan despite your bad credit.

Source: Secondary

Experts speak about rules to create wealth

To create wealth, investors should keep in mind some basic rules that are simple to follow. Here are some of the most important ones from select financial planners, an investment analyst and a top professional in the credit information industry: Save, invest and understand where & why you are investing: We understand that we need to invest but very few understand that we can invest only if we first save. It's important to know how much you earn and spend to arrive at what you can save. It's also important to understand the risks associated with equities, fixed income, commodities, gold, international funds, real estate, etc, and also the resultant return expectations. Also, understand why you are investing. -Shalini Dhawan (SD)

Systematize investing: Being busy individuals, the last things on our minds are handling paperwork, cheques, banking errands, etc. Hence, there is a need to systematize: Automate investments to selected avenues on monthly, quarterly, yearly basis by using technology, available systematic investment plans (SIPs), triggers, alerts, ECS, etc. -SD

Diversify: Diversification across asset classes and within each asset class can eliminate risks emanating from concentration, liquidity, credit, interest rate and currency . This will reduce the overall risk to the portfolio. However, diversification beyond the optimum level does not reduce the risk to the portfolio. -B V R Venkatesh (BVR)

Safety has a price: If you are one of those risk-averse investors, chances are that your savings would be locked into various fixed and recurring deposits.However, over the last few years, you must have got negative real returns. That is, your returns were less than the rate of inflation. In other words, the interest income from deposits has not helped you keep pace with rising costs of goods.That also amounts to erosion of capital -you have lost it through inflation. So, remember to build an inflation-beating corpus through investment sacrosanctness classes including equities, debt, gold and real estate. — Vidya Bala (VB)

Consistency & discipline pay: Emotions interfere with investing — sometimes they work for us and sometimes against us. So, be disciplined to invest a certain amount every month and systematize it. There are many examples of SIPs in diversified equity mutual fund schemes generating sizable corpuses, where investors have consistently run SIPs. Also, discipline yourself to refrain from going off an agreed asset allocation and investment strategy. — SD

Save on taxes to build a kitty: A large number of people focus on expenses like children's education, home loan repayment, etc, for tax deductions from their salary. You should also look into Section 80C investment options seriously. Here you can find investment options that can save on taxes and also build a long-term portfolio with good future returns. These options include equity-linked savings schemes (ELSS), various provident funds, NSCs, five-year tax-saving deposits, etc.

ELSS could offer you the best deal in terms of superior tax benefits and higher returns in the long term. These funds have a lock-in period of three years and compare favourably with other options like five-year tax-saving bank FDs, fiveand 10-year NSCs, or 15-year PPF. The gains from ELSS that accrue are also exempt from capital gains tax, while gains from five-year tax-saving deposits are fully taxable. -VB

Monitor and review: After you have put in place an investment strategy and implemented it, periodically check if the plan is working for you from every possible angle. If you have moved away from the agreed plan, change the asset mix. If that means exiting under-performing investments, do that. -SD

Mind your credit score: Like in business, in personal finance too credit line availability plays a critical role. Today, institutions consider both borrowers' income profile as well as their repayment behavior across earlier liabilities while deciding their creditworthiness. A credit score of an individual is increasingly becoming an integral part of banks' appraisal process in determining whether to grant credit as well as its quantum.The higher your score, the better your creditworthiness and more are the chances of your loan application getting approved. Financial discipline in paying back the borrowed amount (EMIs) on time and as agreed to the lender is the foremost step to ensure a good credit score. Monitor your joint loans or loans where you are the guarantor regularly .It is advisable to get a copy of your credit report at regular intervals when you start taking debt, especially after opening or closing of new credit accounts. In case of any error, get it corrected without delay . -Mohan Jayaraman (MJ)

Seek professional help: We are ready to seek help from dietitians, doctors, lawyers, etc. Likewise, we also need professional help to nudge us into an investing habit. -SD

SD: Shalini Dhawan, cofounder & director, Plan Ahead Wealth Advisors BVR: B V R Venkatesh, director, Value Invest Wealth Management VB: Vidya Bala, head - mutual fund research, FundsIndia.com MJ: Mohan Jayaraman, country manager, Experian India

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Can you get house on rent if you have bad credit score ?

Nowadays, many people face the problem of bad credit. And with bad credit comes several problems from getting a job to financial transactions, to renting a home rather than buying a house. Credit score is not just looked at when you go for buying a loan but also when you go out to rent a house. But unlike when you go for buying a house, renting a house with bad credit is still manageable, if you know what you are up against.

For getting qualified to rent a house, you need to prove to the owner that your bad credit in no way would disqualify you as a bad tenant. So make sure that you prepare your credit before applying for renting a house.

Be prepared beforehand:
Try to clear up your credit as much as you can. Try to give the lender as much documentation you can to show you are now trying to improve your credit score. Try to establish a record of regular bill payments.

In the market for a long time:
Try to search for a house which has been in the market for a long time. These properties are usually in low demand for them being not in good localities or they are in need of renovation. Such low demand properties have less strict terms for renting and you can lend them easily.

Be honest about your bad credit status:
Naturally, we think that our bad credit won’t let us get accepted for the tenancy but there is no point in hiding your financial past for this, it would only backfire. If, later, the owner finds out about your bad credit, he may look at you like you are a risk since you are hiding stuff. Be honest to the owner that you have a bad credit but try to make him believe that you are now changing and striving to improve your credit score.

Large Deposit:
Always save beforehand for a large deposit. Since you have a bad credit, the lender might see you as a lender’s risk and ask for a hefty deposit. If not, you can use the same amount to make him take the decision in your favour. You can also use this deposit as a few months advance rent.

Research & Reference:
Search for an owner who doesn't run a credit score check. You’ll usually find such landlords in local classifieds as they are private and not big management companies. Get references from your previous landowners who could write good feedback about you and then you credit score won’t matter much. If the present owner sees good feedback about the duration of you stay, your payment record, then it would add value to your rent application despite the bad credit.

Source: Secondary

How can small mistakes hurt your credit score ?

Humans can make mistakes and they can be big or small. In credit sphere making small mistakes can also impact your credit score harshly.Credit scoring algorithms do not understand human nature. Let us understand the concept with an example.

Rahul Sharma, had recently bought a three-bedroom apartment in an upcoming locality close to his office. He had a car and was contemplating a big car after getting his annual raise, which came along sooner than expected.

Rahul's Cibil score was around 750 points on a scale of 900 the last time he had checked while buying his first car a couple of years ago. When he decided to apply for a loan to buy a Luxury Sedan, he was in for a huge shock. The bank informed him that his application was rejected because of a low Cibil score and a couple of negative remarks in his credit report. He pulled out his personalized Cibil score and found his score to be around 610.

Rahul had delayed a couple of his car loan EMIs and a couple of his credit card payments. Delayed or missed payments get reported on your credit report by the lenders and have a negative impact of pulling down your Cibil score.

Lenders often prefer a healthy credit score from their prospective borrowers. Here is a table to give you an idea of percentage of new loans sanctioned to people with different credit scores:

Credit score	Percentage of all new loans sanctioned in this Cibil score band
<650	4.7%
650-699	5.2%
700-749	9.7%
750-599	22.8%
>=800	57.6%

Source (cibil.com)

From the above table it is very clear that people with higher Cibil score stand a higher chance to get a loan. Also, it is important to understand that as risk-based lending is kicking into the Indian market, people with higher credit score also stand a chance to get loans at a lower rate of interest.

So, after Rahul studied his personalized credit report from Cibil, he realized his mistake. He had forgotten to deposit cash into the account from where his car loan EMI used to pass. This happened a couple of times and also delayed 3-4 credit card payments. The credit card company had mentioned days past due (DPD) against his account.It slashed his credit score.

It is very difficult to assess how much of a drop in credit score you could expect because of a single missed payment.  One could expect a drop of 50 to 100 points.
Credit score can even be repaired. You need to follow a financially disciplined life.

For ascertaining your score or acquiring credit repairing services contact us at www.cibilconsultants.com 

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How Secured Credit Cards Help You Repair Your Credit !!

There’s an age old saying that, “it takes money to make money.” Well, it also applies to credit cards and credit scores, as you have to have a card to rehabilitate your credit score. Of course, if your score is too low, then you will likely be rejected when applying for a card. So, what gives?

If you are unable to get a regular credit card at even a low limit, you may need to look into a secured credit card. Whereas a regular card is unsecured, meaning that the creditor has no collateral that they can recover if you default on the payment, secured cards have a deposit.

Usually, your credit limit is anywhere from half the size of the deposit you make to 100 percent. You leave that deposit with the credit card issuer, then make your payments each month like you would with a normal card. It’s a good idea to pay off your balance each month. If you near or reach your limit, the creditor can freeze the card and keep the deposit to avoid any losses.

By getting a secured credit card and responsibly making the payments each month, you can start the process of demonstrating to the credit bureaus and future lenders that you are capable of making payments on time.

As a result it is vital that you not miss any payments on your secured card. In addition, it’s important to make sure that the company issuing the card will be reporting to major credit bureaus. That’s because if they aren’t, those bureaus will have no way to account for your improved habits.

If you are a good customer with your secured card, it will usually be transitioned over into an unsecured card after a couple of years. In addition, after one to two years of establishing good credit habits with the secured cards, you may be able to get offers from other credit card companies.

For now, though, all you need to worry about is getting a secured card and maintaining the account without missing any payments. From there, things will begin to fall into place so that within a year or two, you should be able to be well on the way to repairing your credit score and having a decent shot at getting any new credit cards or loans you need.

Need help on your credit score ?
visit www.cibilconsultants.com