What Exactly Is a Credit Score?

Your credit score is a synopsis of your credit history represented by a 3 digit number. It is an indication of how likely are you as a borrower to repay the debt undertaken. This number ranges between 300 and 900. At a glance of your score, a lender can draw conclusions about your performance in the past as a borrower and based on these conclusions will predict how risky is extending a loan to you.

Lenders are in a business of lending and are not there for any charity. Like any business, they undertake the risk of non-receipt of payments when they given loans. If a person has a score of less than 700 and nearing 300, that person is considered to be moderately risky to very risky. Whereas, a person whose score is more than 700, that person is considered to be less risky. A less risky person is more likely to repay the debt whereas a more risky person may not.

A score of “-1” indicates that you are less than six months old in the credit space and do not have enough credit history to be rated upon. A score of “NA” or “NH” would mean that you probably have not had any credit relationship for atleast past 24 months. Your credit score is calculated on the basis of at least 6 month’s data not exceeding 24 month’s data. So any information more than 2 years old is beyond the scope of a score calculation.

So it only makes perfect sense that you understand what factors fuel the calculation of your score and how can you manage them. The Credit Information Bureau (India) Limited determines your score on the basis of the following factors:

  1. Timely Repayments in the past: This is the most important factor and has a weightage of almost 35% in the calculation of your score. By saying this we imply that you must make sure that all your payments are made within the stipulated time limit. For every credit taken, you have to repay it in monthly instalments. For example, be it a personal loan, home loan or you have charged your credit card, every month there is a date given to you for making the payment. You are expected to make the payment by this due date. If you do not make the payment on or before that date, then your payment is marked late. All late payments are reported as “past due” to CIBIL & being late regularly brings down your score.

 

However, if you have been industriously making all payments on time, then it will help build your score and contribute majorly in impressing your lenders.

 

  1. Current exposure to credit: This is the next most important factor and has a weightage of almost 30%. This signifies how much of credit have you already taken. It also helps banks and other lending institutions to calculate your eligibility of loan. The thumb rule is that your credit exposure in monthly EMIs cannot exceed 50% of monthly income.

 

For example, your monthly income is Rs. 1 lakh. Then the limit of your instalment based credit cannot exceed Rs. 50, 000. So, let’s say currently you are paying EMIs worth 30, 000 and have applied for a loan where you will have to bear an additional EMI of Rs. 40, 000. But the bank will allow only an amount of loan where additional EMI burden will not be more than 20, 000. So, total EMI after new loan will be 30,000 + 20,000=50,000

 

  1. The older the better – This factor contributes 15% to the calculation of your CIBIL score. Your score is calculated on the basis of your credit activities in the past 24 months. So, if you have a credit card which you have had for more than 2 years then it will have a more favourable impact on your score than the one which you have recently acquired.

 

  1. The different types of credit mix – This factor too has a weightage of 15%. Banks want to see your ability of handling different types of credit. What is generally recommended by experts is that 75%-80% of your loan portfolio should be skewed towards secured loans, such as home loan or car loan. The fraction of unsecured loans like education loan or unsecured personal loan should not be more than 20%-25%.

 

Also, there should be a healthy mix of revolving credit like using a credit card and that of instalment based credit like EMI based loans. Handling all of these responsibly helps construct your score.

 

  1. Hunt for new credit – This factor although has a weightage of only 5% in the calculation but it has a serious impact on your image as a borrower. A lender enquires about your CIBIL report every time you ask for a credit. Applying for too many loans makes prospective lenders wonder why you need so much credit, will you be able to handle the building debt and interest burden and perhaps, you are already in a debt soup and are seeking more credit to pay that off. Thus, it is not advisable to keep on looking for more & more loans.

Pearls of Wisdom

You can check your CIBIL rating online to keep a tab on it. Your score is not a permanent figure. You can make it or break it depending upon your actions with regards to your finances and credit. If you are reckless with your credit, it will reflect as a poor score. If you have been careful with your credit, it will reflect as a good score. Make prudent choices and stay credit healthy always.

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What CIBIL Score Should I Have To Get A Business Loan?

When one hears someone talking about CIBIL, one tends to believe that it must be related to an individual who is seeking loans such as personal loans, home loans etc. What is not known to everyone is, that CIBIL is the keeper of records for all credit facilities availed by individuals and business entities. Individuals are scored according to their credit performance, whereas businesses are not given any score but their detailed credit reports speak for themselves. Private & Public Sector Banks, Non Banking Financial Institutions, Housing Finance Companies, and other financial institutions, that actively lend to businesses, use Company Credit Reports to estimate the company’s ability to repay the loan sought before they extend any credit facility to a company.

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Unlike individual scores there are no benchmark CIBIL score that you must possess to get a business loan however, there are details in your credit report that could dampen your plans of seeking credit or accentuate your creaky credit situation. You must watch out for them and work to make sure these don’t make way into your report.

 

Understanding the Company Credit Report

 

A company credit report is a factual account of your previous debt repayments, the credit lines availed, lenders who have extended credit and lenders who have enquired into your report in the past. This report helps a prospective lender analyse the creditworthiness of a borrowing firm, which basically means lenders try to judge the likelihood of default by the borrowing entity. The lender is interested in looking for number of “wilful defaults”, suits filed against the company, outstanding loans, existing exposure to credit including those that the borrowing entity has guaranteed etc.

 

Some Commonly Reported – Trade Lines

A business may need several types of loans during its functioning, such as:

  1. Term Loans: Loans that are extended for a specified period and a specific purpose. They can be short term, medium term or long term.
  2. Bank O/D: An overdrawn current account, short term funding.
  3. Letter of Credit: A letter that guarantees to a seller, on account of buyer, that the payment for goods or services will be paid
  4. Bank Guarantee: A sort of insurance against damage or loss of goods or service and to make good the payment.
  5. Lease Finance: Where the bank becomes the legal owner of a particular asset of the borrowing firm and remains so unless the final instalment of the loan is not repaid. In other words, the asset is given as collateral.

And many more.

How to Clear CIBIL Issues

Some of the common stumbling blocks in a report are:

Problem #1: Loans that are “written off” or “settled” by a lender, means loans that went unpaid by the borrower or the lender was unable to extract money from the borrower and were eventually “written it off” in the books of the lender. It quashes a borrowing entity’s aspirations & it may almost never be able to get a loan. A lender may never come around it. Although the report shows information of past 24 months only, but such accounts may remain on your report for a much longer time like seven or ten years.

Solution: Ideally avoiding them could be your best bet. But sometimes, not out of choice but due to financial constraints you were unable to pay off your loans in the past. The only way to have it removed from your report is to pay to the bank now and request the lender to send a clean report to CIBIL for updating.

Problem #2: You have been paying your dues, however in a delayed fashion.

Solution: Change your attitude towards your creditors. This alters the way a lender perceives you. Either the business is not able to generate enough returns to meet the financial obligations on time or the borrowing entity has half a heart to pay back the loan. Either ways, the lender will consider the entity to be very risky. Even if a lender does grant a credit to the firm, it will do so at higher rates of interest.

Problem #3: You seem to be overleveraged already. The amount of debt are already exposed to plays a vital role in estimation of the borrowing firm’s credibility.

Solution: If you are already burdened under a surmounting pile of debt, lenders will be strictly wary of extending further loans. This is because they begin to question your ability to keep up with future repayments. You must first pay down existing debt and then apply for more loans. If you are hard pressed for funds then you could try peer-to-peer or business-to-business loans for the period.

Problem #4: Important financial ratios reflect a poor financial health of the firm.

Solution: Inventory, turnover, receivables turnover, liquidity, leverage, gross profit margin ad return on sales are some of the key financial ratios that credit grantors consider before extending any credit facility to you. These ratios help a lender take a look into the company’s financial health and only if they feel the company is strong financially, they sanction the loan.

Problem #5: The loan to which the firm stood as guarantor has been defaulted.

Solution: As with other things, this again throws a poor light on your credibility. A guarantor has committed to make good a default by the borrowing entity. In the absence of so, the guarantor is as good as the defaulter itself. Although it may not have a direct bearing on your own application but your CIBIL report will carry a remark too. A lender may consider you as someone who does not honour commitments and your image as a borrower will be tarred.

There are certain items or details in your report like incorrect name or address of the firm, repetitive account information, wrong relationship status of the signatory etc. and you would like to have them corrected then raise a CIBIL dispute. You must fill the dispute resolution form online to highlight your concern with the bureau. However, you cannot have any intended defaults or late payments removed from the account.

A clean and healthy credit report enables a borrowing entity to capture favourable terms and gives an upper hand to negotiate lower rates of interest. Thus it is in your own interest to be a responsible credit user and make sure your report shows a credit friendly firm.

Precautions To Take Before You Become A Loan Guarantor

To be a loan guarantor is like sailing on a boat that might have a hole. There is a major risk of ruining your credit for the other person. As, when you become a loan guarantor, you basically become responsible for the repayment of the third party debt in case of a default.

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It is thus imperative to be very confident of your decision to become a loan guarantor. As a guarantor you play as a safety guard for the bank. The bank always want to ensure that the money they lend is safe.

Usually a bank looks for a guarantor(s) in following situations:

 

  1. When the prospect has a bad history and bank assumes that s/he may fail to pay back the obligation. When you have already failed to pay back your EMI, credit card bill or other outstanding in the past, you are looked upon as a risky prospect. A signature of a guarantor shares that risk for bank.

 

  1. When you have a job that doesn’t let you reside in a same city for long and you keep on moving from one city to another. The bank looks for a guarantor to certify your credentials.
  2. Likewise, when you apply for loan at another address and not at your permanent address, the bank may ask for a co-signatory or a guarantor for loan.

 

In all these cases, you can get easy personal loans when another person with a better credit history is ready to share the loan responsibility. However if you decide to become a loan guarantor it is very important that you try to evaluate if the borrower would be able to meet their obligation. You need to thrust complete trust on them that they would not put you in trouble by not paying back their dues.
In fact you need to take certain precautions to ensure that you do not fall pray by signing as a guarantor.

 

  1. Study all terms and conditions very carefully before you agree upon the guaranteeing agreement. All clauses should be precisely clear to you. There should be enough exit or safety clauses in the agreement. For example, you shouldn’t be liable for any changes in loan agreement, such as change in credit limit, without your knowledge. Clearly know about the notice period bank would serve before the recovery action.
  2. Know clearly about the nature of guarantee you are going to offer and what the legal implications are, in case of the default.
  3. Access your financials first. When you become a loan guarantor, your credit limit falls. When in future you would apply for loan or credit card, a lending institution would simply reduce guaranteed loan amount from your credit eligibility. So make sure you do not fall prey when you need fund for your own life goals. Being a guarantor is like carrying additional debt burden on your shoulders.
  4. In case the borrower defaults, the bank would claim debts from you. So, in order to recover the loan, the bank can even start a legal battle against you. All your personal assets including your hard earned cash at bank and property is at risk. To add up to your financial woes, your credit worthiness may touch rock bottom. Your ability to get loan in future would dive down and you would need to learn ways to improve credit score fast.
  5. Default in this loan by the borrower would show up in your credit report. Everything regarding this loan will be reported by CIBIL.
  6. Besides ensuring that the borrower is genuine and capable of paying off loan, you might even need to counsel them or re assure periodically to complete the loan on time. You would always need to ensure the monthly payments are met regularly as it will appear in your CIBIL report.
  7. Never share your personal documents such as ID or passport with anyone, not even the borrower unnecessarily. Submit the required documents to bank only.

 

Despite all these precautions, sometimes you might find yourself under a howling situation wherein whole responsibility of loan default falls on you. Although it is not a cakewalk to shy away from this responsibility you can still send an application to the bank for dismissing your position as a guarantor. The final decision will however stay with the bank and a long legal battle might await for you ahead.
Thus, always try to calculate all pros and cons constructively before you become a loan guarantor.

How to get eligible for the highest credit card limit available?

The highest card limit is not a fixed number. It is relative, and differs from one person to the other. Before you ask for the highest credit card limit to be made available to you, it is important for you to know the exact reason for the request. Let’s check a few of the reasons and then see a few simple ways to become eligible for a higher credit limit for the right reasons.

 

What is the number one reason for you to ask for an increase in spending limit? Are you in the habit of maxing out card often? If that is the reason, you’ll be disappointed to know that credit card companies may not entertain your request. The card that has been issued to you is basis a few factors. The issuing company, even those that offer you instant approval credit cards, may have got cognizance of your shopping trends and / or association with clubs, or they have direct sources of information by way of your salary slips. In addition, if you have credit history already, they will have accessed your CIBIL rating online and downloaded your credit history. So, the initial limit on your credit card is a combination of these assessments. Also, it is essential to understand that your available spending limit is a compound of your income level, after taking into account your current debt obligations and expenses. So, if you trying to become eligible for a higher credit limit, have a sound reason, like earning more reward points on your card that will lower the cost of your frequent need for air travel (a genuine reason), or improving your credit utilization ratio, which accounts for nearly 30% of your CIBIL score.

 

The best way to become eligible is to not ask for the raise, but build credibility, as a financially responsible person. Make your payments on time and keep your credit utilization below 30%. If you sound desperate to have your spending limit increased and the card issuer affirms that you are still not eligible, this can impact your credit score negatively, causing a dip. Even if you ask for an increase, don’t bite off more than you can chew. A 10 – 15% increase is still viable, but doubling the limit is well-nigh impossible.

 

More often than not, your spending limit is revised on a periodical basis. If you are accessing more credit on your card and have managed to stay way out of the loan defaulter list, you will be rewarded with an automatic increase in 6 – 18 months of getting the card. However, if your limit is on the higher side, the chances for dramatic increase are, perhaps, limited. In the meantime if your salary has increased or number of income streams has increased, notify your card issuer. They may revise your limit based on the new income reports.

 

The best way to qualify for an increase is also to use your card frequently and showing financial discipline in paying back on time. This is an indicator to the card issuer that not only do you need access to more credit, but you are capable of managing your finances without a problem.  Make sure to pay off within your billing cycle. When your card issuer observes this pattern over a period of time, your automatic increase will be substantially higher.

 

There is yet another way to become eligible for a higher spending limit. It is unorthodox and may affect your CIBIL rating temporarily, but if the objective is to ultimately improve the credit utilization of your credit card accounts, then this may work. If you have two credit cards from the same company, you may want to transfer the limit from one card to the other. This increases your limit and allows you to spend a bit more. However, ensure not to go overboard. Keep the utilization to below 30% to maintain a good CIBIL score.

A good credit score is paramount to staying on the good books in the financial world. It opens a world of opportunities for more credit and loans. However, it takes some financial discipline to be on the high side of 700. Half your battle for more credit is won if you have a good score.

Is a Higher Credit limit good for your CIBIL score?

Thinking about increasing your credit limit? Worried about how it will impact your CIBIL score? In this article we will cover just that! A credit limit is the maximum amount that a lender permits you to borrow on a credit card. Financial institutions take a number of factors into consideration when they set your limit. They will first look at your credit score, which is a numeric summary of your entire credit history. Looking at your CIBIL rating gives them a better idea of your repayment pattern and your ability to repay future credit. Credit card companies will also look at the outstanding credit made available to you through other credit cards. Getting a higher limit on your card does not automatically mean that you should be splurging beyond your means. Rather, you should be wise in handling credit which in turn will benefit you in a number of ways.

A credit score can be positively impacted when more credit is made available. One of the factors that contribute to your CIBIL rating is the credit utilization rate. The ratio of one’s credit card balance to the credit limit is termed as credit utilization. It shows how much credit a person is using. The lower the credit utilization ratio, the better will be your credit score. Likewise your CIBIL rating will be negatively affected when your credit utilization is high. If you decide to avail a higher credit limit and use all of it then your credit utilization will shoot up and tarnish your credit score. However, if you do not touch the newly availed credit then chances are that your CIBIL rating may improve. You could consider asking for a credit limit increase when your income has increased, when you hold a good credit score and when you do not have much debt. It is important to note that financial institutions can revise your limit from time to time according to your CIBIL rating, transactions etc.

One of the other benefits of having an increased credit limit is that you wouldn’t need to hold multiple cards from different credit card companies with lower limits. You would just need to keep track of a single card and use it as per your requirements. Another advantage of having a higher limit is that it can serve as an emergency cushion, provided that you are disciplined in handling finances. You can use it to pay for necessary car repairs, booking last minute tickets etc. The higher your limit, the more you will have at your disposal in case of emergencies. Additionally, higher credit limits make you more appealing to the credit card companies. Financial institutions offer added benefits to their premium cardholders. Keep in mind that credit card companies and other financial institutions want to see you maintain a high CIBIL rating and follow through your financial obligations.

There are downsides to have an increased limit on your card. This happens when you fail to strictly monitor your spending, which then hurts credit score. Often times when availing a higher credit limit, people start to believe that their CIBIL rating has gone up more than it actually has. This increases the chance that they will apply for new credit which again means more credit inquiries will be made on their credit report. Ultimately it leads to a drop in CIBIL rating rather than an increase. You can also run into the risk of increased debt and higher interest payment. Chances are that you may not be able to pay your bill in full when you have an increased credit limit. That again means you would have to pay more in interests to the credit card companies. Another drawback is that you can end up depending too heavily on credit cards.

Yes, a higher limit means that you have more credit at your disposal. Increasing your credit limit can be a good thing if you are financially disciplined. It can serve as your asset. On the other hand, if you are reckless then you can quickly fall into a debt trap. When credit card companies are letting you avail higher limits, make sure that you get every detail from them. Know the plus and minus points of handling a card. Be responsible with the way you treat credit limit increase. It can easily tarnish your credit score which will take time to build up.