Points to remember about credit ratings.

The world of credit ratings is rife with misinformation and misunderstanding - even some national newspapers have got it wrong on occasion. Much of it's because lenders don't want it understood, and SO CALLED credit repair agents want you to think it works a certain way so they can sell you extra products based on your fear. Here's what you really need to know to debunk the myths...

1. You DON'T have a universal credit rating

There's no such thing as a blacklist. This is a myth. In the INDIA, there's no universal credit rating or score, and there's no blacklist of banned people.

Each lender or banks or NBFCs scores you differently and secretly.

This means just because one bank has rejected you, it doesn't automatically mean others will. Though after a rejection, it's always important to check your credit report before applying again.


Of course, if you've got a poor credit history, or had problems, it can feel like you're blacklisted. Credit scoring is intuitive - would you lend to someone with a history of not repaying?


However, on occasion there are some NBFCs or private firms that specialise in lending to those who have had past problems - though they then charge a whacking rate of interest.


The tools banks use to decide aren't universal either. As well as your credit report , they also look at application information and any past dealings they've had with you, and use the three sources of information to build up a picture of you.
                         
2. Credit scoring is about trying to predict your future behaviour


This is not easy if you've little credit history. When you apply for a product, a 'credit check' is done. In practice, this means lenders pour all the data they have on you into a complicated algorithm. It's an attempt to predict your future behaviour based on what you've done in the past.

While a poor history counts against you, so does having little credit history as it makes predictions less certain.

Imagine you are lending someone money. On the surface, they may appear trustworthy. But if you don't have much information about them, then you probably want to know more, just to be sure.

3. It's as much about 'will you make the lender money' as it is about risk
Many people mail or call to us incensed after rejection of loans or credit card - " I've never missed a payment, why on earth did they reject me?"

This is based on a misunderstanding. Many people think lenders are credit scoring to see if you are a good or bad risk. They're not. They are credit scoring to see if you match up to a wishlist of what makes a profitable customer. Of course, someone who is a bad risk is likely to be scored out as unprofitable by most banks, but risk is not the be all and end all.

Credit card companies may reject you for always repaying cards in full.

You might feel like a dream punter, but for credit card companies you're a nightmare. If they spot this trend, you're likely to be rejected. The most profitable customers are those perpetually in debt, never defaulting, but always meeting the minimum repayment.

Pay off in full every month, don't use your cards enough, or always shift debt to 0% cards, and if they can spot you (it isn't always that easy) some may reject you.

Banks score you based on products they'd like to sell you in the future.

Imagine a bank wants new mortgage customers. That's a costly sell. Instead, it offers a current account paying a high rate of interest on a small amount kept in it. Yet, when you apply, rather than scoring you as a bank account customer, it could actually be scoring to see if you're likely to be a profitable mortgage borrower in the future - you might face rejection if you aren't.

The secretive nature of credit scoring makes this difficult to ever truly know.


4. What banks really know about you?


It's important to be aware of exactly what banks know when you apply, so you can present yourself in the best light. Importantly, it's more than just what's on your credit file.
The application form.
In many ways this is the most important. Here, lenders obtain the crucial details of your pin code, salary, family size, reason for the loan and whether you're a home owner or tenant .
Make sure you fill in the forms carefully. One slight slip, such as a "10,000" salary rather than a "1,00,000" one, can kibosh any application.
Be consistent too, scoring firms filter applications and if there are many inconsistencies - such as changing your job title each time or different phone numbers, it can cause a problem that you may not be told about.
Past dealings you've had with the Bank.

Companies use any data on previous dealings they've had with you to feed into the credit score. This means those with limited credit history may find their own bank more likely to lend to them than others.
Of course, those who've had problems with a bank in the past may find it more difficult to get accepted there too.

CIBIL score with credit report
CIBIL is credit reference agencies compile information, allowing them to send data on any INDIAN individual to prospective banks which are members of the CIBIL. All bankss use alsways cibil credit report when assessing your file. This data comes from existing banks only whihc includes your payment habits with the relevant banks.


5.Your credit score dictates the product and the rate you'll get


In the past couple of years the credit landscape has almost completely shifted towards 'rate for risk'. This means almost every Loan Provider on the market uses your credit score to not only dictate whether they'll provide you with credit, but also what rate you'll get.
The most obvious way this manifests itself is in representative rates on loans. Ofcourse still banks want to business with your with lower score they will charge more rate of interest by taking calculated risk.

Source: Secondary

They affect your credit score most.

You probably already know about the connection between your credit history and your credit report and how both impact your credit score. Remember that your credit score is like the grade on your credit report: companies use this number to rate your likelihood that you’ll repay your debts and pay your bills.

But just what are the factors that go into calculating your credit score? And which ones impact your score the most?

Here’s the breakdown of what affects your credit score, from the highest impact to the least:

Your payment history : Whether you pay your bills on time and if you always pay at least the minimum amount. Even one late payment can impact your credit history.

                      

The amounts you owe : Some percent of your credit score is determined by the amounts you owe, which is made up of two parts: the total amount of money you owe all your lenders and the percentage of available credit that you’re using (like hitting the limit on your credit card). People who are using less of their available credit are considered lower risk than people who are using a lot.

The length of your credit history : The amount of time you’ve been using credit makes up fifteen percent of your credit score. Someone who has been using credit for a long time is considered less of a risk.

New credit you open or try to open : Some percent of your credit score is also based on the amount of new credit you’ve applied for recently. Every time you apply for a loan, credit cards, store cards and even a cell phone, someone will run your credit. Someone who applies for a lot of credit in a short amount of time is seen as a credit risk.

Types of credit : The types of credit you have impact about ten percent of your credit score. People with a mix of credit types, like credit cards, an auto loan, and a mortgage may have a slightly higher score than those with only one type.

So, now you know what makes up your credit score, which is your overall “credit grade.” Your credit report, on the other hand, gives you all the details about each account and shows you everything from how much money you owe, how many accounts you have, how many accounts are in good or bad standing, and how many times a lender or another company has checked on your credit history. Since, your payment history make up 35 percent of your credit score, you’ll want to pay attention to two places on your credit report: potentially negative items (accounts unpaid or past due) and your status and payment history.

Even if you do have a few negative marks on your credit report, the good news is that on-time and regular payments can help boost your credit score. It may take a little time and patience, but paying your bills consistently can help boost your credit.

Source: Secondary

Borrow responsibly !

Whatever you want, you can avail instantly with the help of loans.  But, wait! Have you ever thought that if loans have made our life much simple, then why so many borrowers spiral into debt traps which is making their life severe?  The reason is – ‘borrowing more than you can afford’. Here’s a sneak peek on lending basics for guiding you aim at your goals with the help of borrowed money.

Three essential goals are to be kept in mind. First, don’t borrow more than you can comfortably handle. Second, minimize your borrowing costs by maintaining a good credit score and favoring secured loans. Finally, before retirement, you should strive to be debt-free.

Unsecured debt

Lenders grant unsecured credit without requiring anything from you as security. There is a considerable amount of risk on the lenders part, because if you fail to pay, they have to take legal action to recoup the money they lent. This is why unsecured credit generally carries a higher interest rate than secured credit. However, if you have proven yourself as a good credit risk by having a long history of borrowing and repaying money responsibly then the interest rates can be appealing.

Most people consider having one or more credit cards, which are another form of unsecured borrowing. The interest rate is often high. Indeed, while credit cards can help you manage your monthly expenses; try not to carry a large balance on a regular basis. If you find it hard to control your credit-card spending, consider a debit card instead, where money is taken directly from your bank account. That may make you more careful about your spending.
                   

Secured loans

With secured credit, an asset (called collateral) secures the loan. Due to this security, the lender assumes minimal risk – if you miss a certain number of payments, they can take the collateral. The lender doesn’t have to go the expense and hassle of taking you to court and winning a judgment before foreclosing on your home or repossessing your car.

If you need to make major home repairs or update your house, you might take a mortgage, which is another type of secured borrowing. Interest rates for home-equity loans are typically low, and you can usually deduct some of the interest from your income taxes. Remember, though, that these are secured loans – if you can’t meet the payments, your home is in jeopardy. Secured credit cards allow you to begin in the world of credit. All you need to do is put down a small deposit as security and you can start charging – and building a positive credit history.

Don’t ‘borrow beyond means’

Irresponsible borrowing can not only put you in trouble but can also make your family members’ lives difficult. If you plan to apply for a loan, particularly a home loan, make sure to only borrow what you need and can repay. Most people will want to be debt-free by retirement. While you may borrow a fair amount in your earlier twenties, you should be looking to pay off debts in your fifties, so you’ve eliminated any loans and the associated monthly expense by the time you quit the work force.

The lender will likely to check your credit score, when you apply for a loan. A higher score will increase your odds of getting the loan and may also mean a lower rate. Because your credit score is so important, you may want to head off unpleasant surprises by reviewing it yourself.

It is incredibly easy to take on more debt than you can afford. Whether the balance is secured or unsecured, the consequences for falling behind are severe. However, if you borrow wisely, you can come out ahead and achieve your financial goals quickly and affordably.

Source-secondary

Payment of credit card debts through a debt

A question often asked by borrowers is,” Should I avail personal loan or balance transfer to disentangle from credit card debt?” Short-term debt like credit card can be a convenient source of quick funding but can eventually make a deep hole in your pocket. Remember, the interest rates on credit cards are much higher than that on other loans. But weigh all your options and their consequences before you avail a personal loan or low-interest balance transfer as you run the risk of being debt trapped.

Balance transfer versus personal loans

How can one break out of this viscous circle? Either you should ask your bank or credit card issuer to lower the rate or find out whether you can afford to pay off the debt without opening any new credit accounts. Do a little homework to figure out the right option to protect your credit score and save money.

Although both are possible consolidation options for your credit card debt.

Balance transfers are performed by switching one credit balance over to another credit card, usually for a low promotional rate over a limited time period. On the contrary, personal loans are provided by banks and credit unions and can come in secured or unsecured forms. These loans typically have lower interest rates than credit cards, especially if you secure the loan by pledging an asset, such as your car as collateral.

Selecting which option depends on various aspects. For example, how your debt is currently distributed might limit your options. Even though many credit card issuers allow you to transfer over balances from multiple cards into your new card, not all do. On the other hand, a personal loan is probably the cheaper option.

You might be not found it suitable to pledge collateral against a possible secured personal loan. If you default on your credit card debt, it’s unlikely that the card issuer will sue you and comes after your assets. That changes when you open a secured personal loan; the company does take the asset to recoup its loan if you default.

Whether a personal loan or a balance transfer, both categories are likely to negatively impact your credit score, even if you never miss any payments.
Visit: www.cibilconsultants.com
Source Secondary

When not to use Credit Card

Life has become simpler with the convenience of credit cards and the uncountable benefits it caters. But it often comes at a price of making considerable section of borrowers falling into debt trap which is turning their life difficult. So how can you identify the best times to plunk down the plastic? Here are a few guidelines.

When to say ‘Yes’ to credit cards

Gaining reward points

So many popular credit cards offer reward programs, it’s hard to think of a good reason to carry a credit card that doesn’t. Some offer cash back on every purchase, others pay points. Consumers who qualify can earn hundreds, even thousands of rupees back each year on everyday household spending.

Owning warranty and purchase protection

A credit card can be a great way to protect a major purchase. Most card issuers offer purchase protection and an extended warranty for items bought with the card.

Security purpose while travelling

People who travel can be more vulnerable to fraud simply by virtue of the unfamiliarity of the local language or surroundings. Lost or stolen cash is gone forever, but a credit card can be shut down and replaced during one phone call.

Reaping benefits exclusive to card

Co-branded credit cards typically offer exclusive benefits specific to the brand. For example, some airline credit cards offer free checked bags to people travelling on tickets purchased with the card.

   Beyond your budget

It doesn’t matter if it’s a restaurant meal, a new outfit, the latest smartphone, or a vacation you really think you deserve. Big or small, if you can’t afford it, don’t buy it. Don’t let a credit card trick you into thinking you should have something when it is, in reality, something you can’t afford.

Acquiring mortgage

Mortgage underwriters don’t want to see any changes in your creditworthiness between the time you apply for a loan and the time it closes. If your credit card utilization suddenly goes up, your credit score could take a hit, leaving you unable to qualify for the loan.

Fees is chargeable 

If you’re thinking of paying your mortgage, health insurance premium or other recurring bill with a credit card in order to rack up reward points, think again. Even if the servicer allows credit card payments (many don’t), they’ll charge a fee that deflates or even outweighs the value of any reward.

Having a balance carried

If you have credit card debt, you can’t afford to use your cards. Instead, pay down the balance before you add any new charges to the mix, or you risk getting stuck in a cycle of debt.
Visit- www.cibilconsultants.com
Source: Secondary

Why you should buy Long Term Debt Funds?

Long Term Debt Funds will deliver Double Digit Returns reads the headline on popular finance portal. This is one of the examples, In last 3-4 months, you must have come across similar headlines multiple times if you are a regular investor. At max, the reason given was that with the drop in Interest rates, Bond yield will drop which will increase the Bond Prices. In short, Drop in Interest Rate will benefit the Long Term Debt Funds the most as they invest in Government of India Bonds and Corporate Bonds of long term maturity. Though there is no standard definition of Long Term Debt Funds but in my opinion any debt fund with Average Maturity of more than 10 years can be safely termed as Long Term Debt Funds. These funds are normally benchmarked against the G-Sec yield of 10 years or Govt of India Bonds. As of today, the yield of 10 year G-Sec / Bond is 7.799%.

Movement of Average maturity of debt fund gives the fair idea how the interest rates will move in near future. In last 6 months, the average maturity of almost all Long Term Debt Funds, Dynamic Bonds and Income Funds have increased considerably. Average Maturity of the best performing fund in this category i.e. ICICI Prudential Long Term Fund is now 19 years. 6 months back it was around 11 years. IDFC Dynamic Bond fund which is consistently rated as “Consistent Performer – Debt Funds” in CRISIL Mutual fund ratings, Average Maturity is now 15.39 years. It clearly implies that Industry is anticipating further rate cuts by RBI to fuel growth in the economy. Any rate cut will result in lower Bond yield. Lower Bond yield will increase the Bond Price, therefore, these mutual funds may deliver double digit return. If you invest in right debt funds then you can always beat the returns of traditional popular debt instruments like Fixed Deposits, Recurring Deposit, Post Office Savings Schemes etc.

Co-relation between Bond Yield and Bond Price

Before you invest in Long Term Debt Funds, you should understand the concept and co-relation between Bond Yield and Bond Price. Though in all the posts it was mentioned that with the cut in the interest rate, Bond yield will drop thus it will increase Bond Price. This relation can defined in 2 ways which don’t have any co-relation with each other. One is the scientific justification and another is Sentiments i.e. Demand and Supply theory.

Though these calculations are very complex but let’s understand with an easy and simple example. Assuming Long Term Debt Funds bought a Bond A of Rs 1000 with the maturity of 10 years at the coupon rate of 9%. In this case, Bond Price is Rs 1000 and Average Maturity is 10 Years. The Bond yield is 9%. If there is no change and status quo is maintained then these 3 data points will remain the same. The fund house will happily receive Rs 90 i.e. 9% of Rs 1000 as an annual returns. The average return of Long Term Debt Funds will be fixed 9%. The real game begins when interest rate either increase or decrease. Let’s check what will be impact on Long Term Debt Funds in these 2 scenarios

(i) Interest Rates Increase: Now assume that RBI increased Repo rate and Interest Rates are now 10%. In this case, fund house will still get Rs 90 as an annual return but as the interest rate is 10% therefore Bond Price will drop to Rs 900 i.e. absolute return will remain fixed at Rs 90 only but now this Rs 90 should be 10% of Bond Price to adjust the Bond Price. Therefore, reverse calculations fix the Bond Price at Rs 900. The investor will lose in this scenario as the value of his bond is now Rs 900 whereas he bought for Rs 1000. Let’s check why the price of a Bond A dropped by Rs 100. Let say, the mutual fund house buys another Bond B after interest rate increased (Offered after interest rate increase). The Coupon Rate is now 10% and Bond Price is  Rs 1000. The maturity of Bond is 10 years. In this case, fund house will get Rs 100 as an annual return whereas in Bond A, the fund house is earning Rs 90 only. Face value or Bond Price of both the Bonds i.e. Bond A and Bond B is Rs 1000. But Bond A will return Rs 90 and Bond B will return Rs 100. In case of status quo, For 10 years Bond A will return Rs 100 less than Bond B therefore price of Bond A is now Rs 100 less than Price of Bond B. To conclude, in case of Long Term Debt Funds if the interest rate increase then the returns drop. It can be negative also depending on the fluctuations in the interest rate cycle. In this example, we considered Bond for simplicity purpose but same co-relation exists in G-Sec yields of different maturities.

Secondly, on sentiment front the demand of Bond A will not be there if price is more than Rs 900 because the investor will buy Bond B with the higher yield at 10%. At Rs 900, the yield of Bond A is not adjusted as per market condition. Therefore besides scientific calculations, sentiments will also pull down the price of Bond A to Rs 900. If there is further anticipation of an increase in interest rates then Bond A will take further beating and may trade below Rs 900.

In this scenario, Long Term Debt Funds will decrease Average Maturity as the instruments with short maturity will gain maximum from the increase in interest rate.

To conclude, Bond Price is adjusted according to the current yield. Bond price will drop if the current yield is more than the yield of Bond and vice versa. Let’s understand what will happen when Interest Rate decrease which is the current scenario.

(i) Interest Rates Decrease: Currently interest rates are decreasing. RBI has cut the Repo rate twice by 0.25% each. In this same example of Bond A. Assume, Interest Rates are now 8%. The fund house will still get Rs 90 as an annual return on Bond A. Bond Price will be adjusted to the extent that this Rs 90 is 8% of Bond Price. Therefore, Bond Price will increase from Rs 1000 to Rs 1125. The Bond will be traded at a premium of Rs 125 i.e. 12.5%. The NAV of Long Term Debt Funds will increase to the same extent. Again let’s assume that Long Term Debt Funds buy another Bond C after interest rates are decreased. Bond Price of Bond C is same Rs 1000 and Coupon Rate is 8%. Assuming same maturity of 10 years, annual return from Bond C will be Rs 80 against Rs 90 of Bond A. In this case, compared to Bond C there will be more demand for Bond A and market sentiments will pull the price to around Rs 1125 till the Bond yield is adjusted to 8% i.e. at current rate. Long Term Debt Funds which bought Bond A at face value will get the double advantage of higher yield and appreciation in Bond Price. In Short, Long Term Debt Funds which bought at Rs 1000 will gain maximum in this scenario.

Long Term Debt Funds

As it is always mention that before you invest in any financial instrument, it is advisable to understand how to it works. In the current scenario, you can invest in Long Term Debt Funds and stay invested for next 24 months to 30 months till interest rates are dropping. The advantage of understanding the investment philosophy before investment is that it signals when is the right time to exit.

If you are risk averse investor then very simple philosophy is to invest in Long Term Debt Funds when interest rates are falling. You may shift your investment to short term mutual funds when the interest rates start increasing. Another option is to invest in Dynamic Bond Funds as they change investment strategy with interest cycle. Following are some of the Long Term Debt Funds suggestion from my end. 

1. ICICI Prudential Long Term Fund – Regular Plan (Average Maturity: 19.05 years)

2. Birla Sunlife Dynamic Bond Fund – Retail (Average Maturity: NA, roughly near 10 years)

3. IDFC Dynamic Bond Fund – Regular Plan (Average Maturity: 15.93 years)

4. DSP BlackRock Strategic Bond Fund – Institutional Plan (Average Maturity: 11.60 years)

5. UTI Dynamic Bond Fund (Average Maturity: 13.63 years)

Disclaimer: You must have observed that Dynamic Bond are preferable funds compared to pure Long Term Debt Funds. The reason being, Dynamic Bond Funds are flexible in nature as they increase the Average Maturity when interest rates fall and accordingly decrease the maturity when interest rates start increasing. Currently, Dynamic Bond Funds are like Long Term Debt Funds for me. You don’t need to actively manage these funds. To hedge risk, Average Maturity of portfolio ranges from 10 years to 20 years.

Long Term Debt Funds are Risk Free

Now you must be wondering we discussed price fluctuations of Bond Price and if interest rate fall then they may give heart attack and now they are Risk Free…That’s correct, Long Term Debt Funds are risk free because price fluctuations are normal during the interest rate cycle. The principal invested in risk free in Long Term Debt Funds. At the time of maturity, Principal amount i.e. Bond Price is redeemed to the investor. In short, if the investor or Long Term Debt Funds held the bond for 10 years then Rs 1000 will be redeemed irrespective of current Bond Price. Only fluctuation is in returns, but the principal is safe and secure.

Visit- www.cibilconsultants.com
Source-secondary

Home Loan from Housing Finance Company

1. Higher Loan to Value Ratio: This is the biggest plus point for a Housing Finance Company. As HFC is not governed by RBI therefore they can include stamp duty and registration charges towards the cost of the property. Let’s understand from an example if a person is buying a property worth Rs 100. The stamp duty and registration cost of the property are Rs 6 i.e. 6% (Average). In this case, total cost of the property is Rs 106. Depending on my Home Loan Eligibility, Bank will approve LTV of 80% on Rs 100 i.e. Rs 80 as bank will not include Rs 6 towards the cost of a property. In short, he avail loan from a bank, he have to pool in Rs 26 from his pocket and his effective loan to value ratio is 75.47%.

Considering, he avail Home Loan from Housing Finance Company. In this case cost of property for Home Loan will be considered as Rs 106 and Loan to Value ratio of 80% effectively means that he can avail Home Loan of 80% of Rs 106 i.e. Rs 84.8. In this case, he have to pool only Rs 21.2 from my pocket. For simplicity purpose, he explained with an example of Rs 100 but it will be substantial amount considering the High Value of Home Loan. To summarize, Own contribution in case of Home Loan from Housing Finance Company is lower compared to bank thus higher home loan value.

2. Tie up with builders: Builders also deserve equal credit for the success of Housing Finance Company. It’s a win-win situation for both the parties as HFC’s offer higher commission to builders, are bit lenient on the legal process and most importantly, offer subvention schemes. Banks cannot offer subvention schemes due to strict RBI guidelines. Builders push loan from HFC very hard especially small  builders. USP is Pre Approved Project, therefore, minimum documentation and hassle free processing. Buyer is not able to understand the disadvantages of this trap. Builders de-sell, banks or Home loan providers who have not approved his project. As a thumb rule, you should never invest in a project which is not approved by at least 5-6 Home Loan Providers including 2-3 Banks. Buyers fail to understand that HFC’s are very lenient on Legal Check process therefore they have to be careful. Any project which is not approved by any of the banks and only by HFC/s is a big NO. The strategy of the builder is to get the project pre-approved at the time of launch and then there is a large scale deviation from approved layout plan. Banks don’t approve such projects.

3. Higher Home Loan Eligibility: A Housing Finance Company is a bit lenient in fixing the Home Loan Eligibility depending on the income, liabilities, risk assessment etc. As mentioned there is high pressure to re-deploy the funds due to high cost. Moreover, they have to compete with big boys. As a thumb rule, you can expect 10% more Home Loan Eligibility through Housing Finance Company compared to Banks. It’s a big incentive for the borrower as it means less burden on their pocket.

4. Self Employed & Businessmen: In India, we suffer from the colonial mindset of being a Servant. In Hindi, Private Job is called “Naukri” and though we don’t like but an employee is “Naukar”. We prefer “Naukri” over entrepreneurship because of steady income. The same mindset is a roadblock at the time of availing loan. It is very difficult for self-employed and small businessman to avail Home Loan. Loan requirements are stringent compared to Salaried class. At the same time, Housing Finance Company is a bit lenient in terms of calculation and consideration towards business income of non-salaried class. It is observed that non-salaried class i.e. self-employed and small businessman prefers Housing Finance Company for Home Loan requirement.

5. Low weightage to CIBIL Score: A Housing Finance Company especially small HFC’s are lenient on CIBIL score consideration. Seen cases wherein people with CIBIL Score of 700 received Home Loan approval. Whereas with banks score of less than 775 means end of the dream to own a house. This point is very subjective and depends on case to case basis. There is no general rule, but normally HFC’s are also bit lenient on CIBIL Score requirement. The only word of caution is that Many people with low CIBIL score paid a commission of 5% – 10% of Home Loan value to DSA to get Home Loan approved. It’s an unethical practice. Please note that DSA’s of HFC’s take undue advantage of the borrowers. They can’t influence even 0.1% of Home Loan Process. Always deal with a responsible employee of Bank / Housing Finance Company to process Home Loan. You may utilize the services of DSA only for the operational part.

To summarize, Selection between Bank and Housing Finance Company is a sort of prisoner’s dilemma. By being lenient on Home Loan process, a Housing Finance Company is doing more harm to a borrower than good. Whereas borrower perceive it otherwise. Because of this reason, you may observe that Home Loan default is more common among HFC’s Borrower compared to Big banks. Risk Assessment of a borrower should be non-negotiable. From borrower’s perspective, it better that Loan is rejected at initial stages instead of EMI default at later stages. It is always suggest buying a property with min 40% self-contribution.

Visit- http://www.cibilconsultants.com

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

Loan against salary

Loan against Salary is one of the least exercised options during a financial emergency.  The objective is to share all the possible alternative sources of funding with readers. Due to the myopic view of Personal Finance, a person will never come to know that he can raise funds through existing resources / assets. Loan against Salary is one such option for salaried class which is least known in India. Loan against Salary is nothing but another form of either overdraft facility or Personal Loan but the process is convenient and hassle free. Moreover, Loan against Salary is bundled with benefits which are missing in a personal loan or overdraft facility.

What is Loan Against Salary?

As a 1st option, you can avail Loan Against Salary from your employer but only very big organizations provide this facility. You can approach bank only if your organization does not provide any kind of loan facility to its employees. Organizations offer such loans at dirt cheap interest rate of 2% – 5%. It is more of a retention tool for organization i.e. to retain the employee. Therefore, it is only extended to top performing employees. In this post, we will discuss availing Loan Against Salary from the bank with which you your maintain salary account. In this case, the bank has financial relation with both i.e. organization and the employee. In short, the bank has a risk profile of both the parties for ready reference. Lets get clear that  Loan Against Salary cannot be taken as granted. Approval is solely at the discretion of a bank. Some banks put a restriction that an employee should be working with the organization for say 3 years or 5 years to avail Loan against Salary.

Normally bank disburses this kind of loan either as an overdraft facility or Personal Loan at discounted interest rate. Terms and conditions offered are favorable for the borrower. In Banking sector, Overdraft facility is normally available for current accounts. Before you opt for either of two, it is critical to understand the pros and cons of both Overdraft facility and Personal Loan. The biggest advantage of  Loan Against Salary is that processing is very fast and without much hassle. Charges are minimal and rate of interest is lower compared to market rates. Let’s check both the types with salient features:

Overdraft Facility

The best example of overdraft facility is accounts opened under Pradhan Mantri Jan Dhan Yojana. These accounts have inbuilt overdraft facility of Rs 5000. In layman terms, you can withdraw Rs 5,000 over and above your account balance subject to certain conditions. The overdraft facility is basically a loan / credit extended for a short term to take care of the financial emergency. Overdraft facility can be extended with or without collateral / security / guarantee. It is decided by the bank based on risk assessment of a borrower. The borrower has to pay interest on the overdraft facility. It’s a misconception that interest is not applicable on Overdraft facility. In this case, there is no actual disbursement of amount / loan. The customer is allowed to withdraw approved amount from his / her account as per the requirement. It is not necessary to avail 100% overdraft amount, customer may opt for lower amount depending on his/her requirement. This is a major plus point of overdraft facility compared to Personal Loan. The biggest disadvantage is that amount approved is much lower compared to the personal loan. 

You can avail overdraft from your salary account only if your organization is in the approved list of the bank. The maximum amount allowed is 3 / 5 times of your monthly salary. Normally the salary considered is net take home salary which is credited in your salary account. For example, if your take home salary is Rs 50,000 then your eligibility for Loan Against Salary is Rs 1,50,000 but subject to certain conditions. These conditions are minimum and maximum overdraft amount as decided by the bank. Normally this range is from Rs 25,000 to Rs 1,00,000. Interest on overdraft is charged only on the amount utilized therefore it is beneficial compared to personal loan if you don’t know the exact loan requirement.

Depending on the risk assessment of a borrower, the bank may ask for some asset as collateral / security / guarantee. To be eligible for an overdraft facility, banks impose minimum salary criterion normally Rs 15,000 (Net Take Home Salary). There is no pre-payment penalty for the closure of overdraft facility. Minimum 3 salary credits are required to be eligible for the overdraft facility.

Banks charge nominal processing fees of between Rs 250 to Rs 500 for overdraft facility and repayment period is usually 12 months. This facility can be renewed provided your repayment history is good. If you leave your organization then you need to immediately close the overdraft facility by paying the amount utilized.

Personal Loan

For higher loan amount, personal loan against salary is best option. Banks can lend up to 10 lakh or 15 / 24 times the net take home salary, whichever is lower. Eligibility criterion is stringent for personal loan compared to an overdraft facility. The borrower should have completed min 3 / 5 years in the organization and min net monthly salary should be between Rs 20,000 to Rs 50,000 depending on location. The repayment period is between 2 years to 7 years.

Banks charge 1% to 2% as a processing fees which is on a higher side. For higher loan amount bank may demand collateral / security / guarantee. The interest rate is between 12% to 15%. Some banks also insist for loan insurance depending on the risk assessment of a borrower which further add to the cost.

Check-Off Facility

While availing Loan against salary, you will come across a term called check-off facility. Banks offer different loan eligibility criterion for a loan against salary with check-off facility and without / partial check-off facility. Loan against salary with check-off facility are more secure therefore bank may offer more favorable terms to the borrower including the lower interest rate.

The Check-off facility is the facility under which Employer of the borrower agrees to deduct the EMI from his/her salary. The EMI deducted from the salary of the employee will be directly remitted to the Bank (lender) by the employer. A tri-party agreement is signed between Bank, Employer and the Employee / Borrower with an undertaking from employer to deduct EMI from salary. An employer also guarantees that outstanding will be repaid if the employee will leave the job before the loan is closed. The outstanding amount of bank is deducted from the full and final settlement of the employee by the employer.

Last but not the least, any loan availed against salary is reported in CIBIL Database. In case of default on EMI / Repayment, your CIBIL Score will be impacted negatively.

To summarize, Loan against Salary is another form of an overdraft facility or Personal Loan. The only difference is that by availing Loan against Salary through your salary account/ employer/check-off facility may entail you favorable terms and conditions. It also includes lower interest rates compared to the market rate. The process is fast and hassle-free. You can expect loan disbursement in 2-3 working days. Loan against Salary should only be utilized under emergency situation. You should repay asap. EMI should not exceed 50% of monthly net take home salary. If you can manage your finances well then Loan against Salary can be very useful to manage financial emergencies.
Visit- www.cibilconsultants.com

Source-secondary

Pay off with credit card to increase your CIBIL score.

Credit reports are used by loan companies to help them determine whether you are a good risk or not and if you are likely to repay any loan taken out. There are some very simple steps you can take to raise your credit rating. Many of these actions are things not to do also.

"If you consistently pay off your bill as soon as you receive it, your balance will remain lower. If, on the other hand, you continue to charge up the card between receiving your bill and paying it off on the due date a couple of weeks later, your reported balance will be higher. This increases the chances that when the credit bureau takes the snapshot, your credit utilization ratio will be higher."

Avoid jumping from credit card to credit card.: If you "transfer your balance" - a scheme that doesn't hurt you, and gets you 0% interest on your balance for a period of time, sometimes as long as a year – unnecessary don't open the new account. Your credit history looks better to the credit bureaus if you have long-standing, established accounts.

Rely on your seniority in age: You can't do anything about, being older, but at least there's something good about ageing! Age is one of the personal factors which bureaus take into account while giving the credit ratings.

Regularly pay your bills on time: This is actually first in the order of things you must do to better your credit score. Each late payment is affecting your credit score and presents a picture of unreliability. You must determine that, if you want to improve your CIBIL score, you should pay your bills on time. The biggest hunk of your credit score is based on your payments history.

Source: Secondary

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