CIBIL Score and Credit Card Limit

Credit Card Limit is basically “Spending Limit” allowed on your credit card. Credit Card is riskiest business for any bank. The default rate is very high on credit cards as it is totally unsecured credit extended to customer. Now a days banks are extra cautious while issuing a credit card. A credit card is issued only after due diligence. Every credit card has different credit limit depending on risk profile of the customer. Credit card limit is decided based on income, current loan portfolio, expense pattern and overall risk assessment of customer by the bank. Banks pull out CIBIL report of a customer to check most of these point. If CIBIL sore is less than 750 or there is a default on payment in past then Credit Card application is not be approved. Basically CIBIL score is a credit report card of a customer i.e. how he manages his personal finance and credit discipline followed by the customer.

Credit Card Limit and CIBIL Score

When the credit card is issued, banks play safe and keep Credit Card Limit on lower side. Based on the usage of customer and payment history, banks keep revising Credit Card Limit at regular intervals normally 12-18 months. At macro level, higher credit limit shows that bank has high confidence on customer that he/she will not default on credit card payment. Credit Card Limit is good pointer how your CIBIL score is moving. If bank offer to increase your credit limit then you should grab the opportunity. It also implies that you are following good credit practices.

As a thumb rule, you should never use your credit card limit more than 30% of approved credit card limit. If current limit is not sufficient then you can always request bank to increase your credit card limit. It is not necessary that bank will oblige. As a back up plan, you may opt for 2nd credit card which will give slight cushion. Credit limit will not increase drastically until unless you are eligible for enhanced eligibility based on usage patter and credit history. An increase of 20%-30% is decent. It is always advisable not to keep more than 2 credit cards.

In normal scenario, financial advisers suggest not to increase credit card limit even if the bank offer to increase the same. Their main concern is that with increase in credit card limit, a customer will tend to spend more. The point is that Bank offer to increase Credit Card Limit only when they observe that customer is following good credit practices. It also imply that customer is using credit card responsibly and making all payments on time. As it is mentioned that as and when bank offer to increase the credit then you should opt for it. At the time, increase in credit limit does not mean that you should stop following good credit practices. Obviously with increase in income level, credit card usage will increase. In order to maintain discipline you should never utilize more than 30% of available credit card limit.

As it is highlighted that higher credit limit means high confidence of bank in your re-payment capability therefore high Credit Card Limit has positive impact on CIBIL Score. Normally Credit Card Limit is around 2.5 to 3 times of monthly gross salary. Assuming a person's monthly gross salary is 1 Lakh. His credit card limit should be between 2.5 lakh to 3 lakh. This cumulative limit is across credit cards in case he is carrying multiple credit cards. If he have 2 credit cards then my cumulative credit limit should be in this range. Credit Limit of more than 3 times monthly gross salary will have positive impact on your CIBIL Score. 

High Credit Card Limit will reduce my future Loan Eligibility

This is the biggest misconception that increased credit limit will eat into your Loan eligibility. Credit Card limit is somewhat similar to overdraft facility extended to the customer i.e. facility is extended, customer is availing or not is different. Credit Limit should not be misunderstood as Loan or Mortgage. Reason being, till you utilize this limit it will not be considered as Loan or credit. Therefore it is advisable to utilize only 30% credit card limit at any given point of time. A parallel can be drawn between Credit Card Limit and Home Loan Eligibility. In case of Home Loan, assume based on his eligibility bank fix his Home Loan eligibility as 1 Cr. If a person only opt for a Home Loan of 40 lakh. In this case his loan/credit liability is restricted to Home Loan availed i.e. 40 lakhs not 1 Cr (Home Loan Eligibility). Similarly in case of a Credit card, if a person's credit limit is 3 lakh and he only utilize 75k then his credit/loan liability is 75k which will eat into his total loan eligibility.

Holding Period of a Credit Card

Some people have habit of churning credit card as and when they receive new credit card offer. It is not advisable to churn credit card because holding period of a credit card i.e. from how long the customer is using particular credit card also impact Credit Limit thus CIBIL Score. It require atleast couple of years time to understand the credit behavior of a customer. Normal credit cycle is of 1 year because credit usage vary from month to month. A person's credit card usage is high during the month of April as he pay all his annual insurance premiums during April. Similarly, usage can be drastically low during September and February. In order to discount all these seasonal variations, credit cycle of atleast 2-3 years is considered to understand credit behavior. Besides credit cycle, longer holding period of credit card shows stable credit behavior of a customer. Holding Period directly impact CIBIL Score therefore if you are using same credit card from last 5 years then there is high probability of better CIBIL Score.

To summarize, Credit Card if used judiciously and intelligently can help to improve CIBIL Score in long run. Some people have misconception that since they don’t use Credit Card therefore they should have high CIBIL Score. Answer is CIBIL score is a derivative of Credit history. If you don’t have any credit history then how financial institutions will check your Credit history. Only a good credit history can help to build good CIBIL Score of more than 750 in long run. Credit Card is one of the easiest and convenient way to improve CIBIL Score & you should not miss this opportunity.

Hope you liked the post and remember that good CIBIL score is result of good credit practices. It cannot be improved overnight. Beware of agencies or companies which promise overnight improvement in CIBIL Score through fraudulent ways.

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

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

Source-secondary

Can a car loan be rejected?

In today’s modern life, every individual thinks to have the best for himself and his family. To give his family the best of everything, they work day and night. An individual first tries to get a safe shelter for his family and then other luxuries. Now luxury includes good interior, expensive clothing and of course a means of transportation i.e. a car.

In the present time car has become necessary for every individual, rather be a salaried person or a businessman. Every individual wish to provide an easy mean of transportation for his family. Earlier it was quite tough for every individual to get a car, but now a days due to easy financing options provided by financial companies have made it easy for the individuals to get their vehicle easily.
 
But can a car loan be rejected? Does an individual have low credit score affect his decision to get a car loan?
 
Yes, even a car loan can be rejected. Mr. Ajay, a salaried individual applied for a car loan and it got rejected.
 
Mr. Ajay is IT professional. Being an IT professional had a decent salary. As he had taken a home loan which was currently continued, could not get a car by full payment. So he applied for a car loan. Looking at his salary, it was easy for Mr. Ajay to get approved for a car loan. But he was shocked to know that the financial institutions had rejected his loan.

But even after having a decent salary, why was the loan application of Mr. Ajay rejected. The reason behind denial of loan stated by the financial institutions was “Credit score of Mr. Ajay was low, due to which the loan application was being denied.”
 
Credit Score? Mr. Ajay had never heard of such word. But can this credit score be the reason for denial of a loan?
 
Credit score is basically a three digit numerical figure which ranges from 300 to 900. This score is generally rates an individual as per his credit history. Generally a credit score of 700 and above is considered as a good score.
 
Credit history is the snapshot of past and current credit relationship of an individual. It states whether the individual has been consistent in making all his payments. Credit history nowadays has become an important part of finance. But people are not much responsible as they should be which can make their credit history poor.

These credit scores and credit history of an individual are calculated by credit bureaus. The banks and the financial institutions provide all the information of every individual to these bureaus to check their creditworthiness. The major credit bureaus in India are CIBIL, Experian, Equifax and High Mark. Every bureau has a different method of calculating their score. Based on the score calculated by the bureaus, banks and other financial institutions check the creditworthiness of individual.
 
After knowing everything about credit score and credit history, Mr. Ajay felt that all these are very important aspects of finance for every individual.
 
Mr. Ajay realised the truth that individuals with bad score and poor history would face rejection in their each financial attempt. Banks and financial institution will be able to provide financial help to such individuals. As these individuals will gain trust of these institutions as their history is poor.
 
Now where there are many individuals who have low credit score and poor credit history, these people need someone who can assist them to get out of such situation and improve their finances. Credit repair companies are those institutions are those companies whose aim is to help all the people to restore their finances.