Having a Good Credit Score can be a Money Saver. Read How?

If you were posed with the question that why should you have a good credit score, then the most common answer would be to get a loan application sanctioned. Well, that is true and is indeed often the primary and most common use of a good credit score. However what if this good rating can help you in other aspects also. One added use of a good credit score is in securing a job; apart from that a healthy rating can help you save money too. If you are wondering how, then the following discussing is for you.

How Can a Good Credit Score Help Save Money?

A good score is important, that is something which most of us may be aware, but how it can be a money saver? Here we discuss a few ways in which it can help you save money.

  • Helps Save Interest Cost: Lender charge interest on loan for two reasons; first for allowing you to use money that does not belong to you and second for the risk that they undertake when lending. As we know higher the risk higher the interest at which the loan will be available to you. Thus if you have a good score you can approach the lender who offers most competitive rates as you are sure of getting your loan application approved provided you comply with rest of the requirements laid down by the lender. A good score also prompt the lender you a loan at lower rates because they would be assured of getting the money back. So whether it’s personal loan interest rate or home loan interest rate, even a change of half a percent could help you save huge amounts. Obviously actual saving would depend on the quantum of loan, but a drop in rate however small is welcome.

  • Gives You Bargaining Power: Another way a good score can help you is by giving you a bargaining power to negotiate favorable terms with lenders. This means you can get a concession or waiver on various additional charges like the legal fee or the processing fee and you could also get favorable terms on pre-payment charges. All this could help you save money on your loans.

  • Could Help you Land a Job: This is not as much save money as earn it. Lots of organizations are seeking credit reports of applicants before hiring them. So if you do not have a good CIBIL Score you could end up losing a job opportunity despite having the right qualifications and skills for it. Not getting the job you deserve or have the qualifications for because of poor rating could make you lose lot of money in terms of remuneration.

  • Lets you Access Funds When you Need Them. There might be times when you might want to get a loan sanctioned at a short notice. This may be due to some emergency for which you need funds or because there is a window of opportunity like a deal on a car that you want to buy. Not being able to get funds on time could mean that you could end up losing that special offer which means you lose money when you buy it without the offer. It could also mean that you have to borrow at higher rates to deal with the emergency or break your investments,

So as we said earlier a good score is your ticket not only to getting loans sanctioned but it also lets you save money in various ways. Thus being credit healthy at all times became all the more important.

Why You Should Keep Your Credit Utilization ratio within 30-40%

Since years we have been listening to the saying, that spends only that much, how much you can earn. However, over the past few years, he thought has been changing. With credit cards coming into the picture and the availability of them have made it easier for many people to spend even when they do not have that much cash on hand for that moment. Credit cards have made it easier for people to access money when in urgent need. But, there are few asterisks (*) that comes with whatever we peruse. And when it is a credit card, the credit utilization holds the biggest asterisks. Even though the card has a given limit, it is never a good practice to use all of it!

With credit cards comes the credit utilization ration. But that? And what it? Let’s understand this with an example. Suppose the credit limit of a particular card owned by someone is 1,00,000 Rs; then it is advisable to use 30% to 40% I.e. 30,000 to 40,000 Rs max. Credit utilization is basically the amount that is spent on the total credit that is available to an individual of their card. And, the credit utilization ratio is the amount used divided by the total available credit limit. Now, the next question that arises is: why to maintain the ration? When the limit available is more, then why not use more.

A credit score is an answer to that. With many criteria that have their effects on credit score, this one also plays a role. The reason behind is, more the usage, more the debt. More the debt, more it seems that the person is in need of credit. And more the need of credit shows more debt burden. So its a huge chain of logic that have been eventually considered after studying many of the cases. The irony is if you have more than one cards, and collectively if you spend, and exceeds the total limit, 40% would still be okay. So, taking the above example, if there is one more card of the same limit, 1,00,000. and if one uses, 35,000 each card, i.e. 70,000 in total then it is okay. As the total credit limit available is 2,00,000. But, using 70,000 from single card shows credit hungry behavior. Of course, this does not mean that one should keep applying for the cards and use it. Everyone should always check the amount which they would be able to repay if spent before then paying.

Credit score a tricky concept. But easy to understand. More the usage of the credit card will imply that the cash in hand is unavailable. When the credit card is given, an individual’s salary or bank account is checked if they are either salaried or self-employed respectively and only then the card is offered or approved. But many, misuse it. And hence the credit bureaus check the credit utilization ratio. What to do if the usage is more and the limit available is less? Simple, as mentioned earlier, apply for one more card. But, one should not apply for too many cards. Even that states that it is a credit hungry behavior and one is in bad need of funds. Similarly, closing the older credit cards also would impact the score as the older accounts shows the credit behavior one has over these years. And account history is also one of the factors which comprise the credit score. Also, if one does not want to apply for new cards, they can always make the payment more than once a month. When the usage seems to exceed 30%, make a payment and revive the credit limit!

The moral to all this is, anything used on average is good. May it be the credit that is available! Using 30% to 40% of the total limit available over the credit card shows a responsible behavior. And that also maintains the score!

Use Secured credit card to Repair CIBIL score

If you have recently ordered your CIBIL report and found that you have a low CIBIL score, it is time to take charge of the situation and work towards improving it. Banks and financial institutions avoid issuing credit cards or lending money to individuals with a bad credit history. They pay a lot of attention to a person’s credit worthiness to avoid any risk of defaults. So a good CIBIL score plays a crucial role in the lending approval process. Many banks have cut off limit of a score of 650 -700 below which they reject the loan application.

In order to repair CIBIL score, one needs to prove that one can handle credit responsibly. For this one needs to make timely payments of loan instalments or credit card bills every month. But with a low CIBIL score, it would be hard to find a bank that trusts you with its money, or is ready to take the risk of lending to a person with a bad credit record. At such difficult times Secured credit card is a way out of this vicious cycle.

A secured credit card, works like any other card offered by numerous banks. The only difference here is that it requires one to keep a fixed deposit with the bank. The deposit amount then determines the credit limit that the bank offers on the card. So essentially, the bank does not face any risk of default. If the card owner does not pay his credit card bills, the deposit amount kept safe with the bank can be used to recover the amount.

Let’s look at some more features of a secured credit card

  1. Usually you do not earn any interest on the fixed deposit amount. You cannot close the FD till the time you are holding the secured card. Foreclosure of FD leads to cancellation of the card along with payment of applicable fees. After a year or two of responsible payment patterns, one can request a conversion of secured credit card to a normal card.

  1. There is very little documentation required to get a secured credit card. Generally all you need is an ID proof.
  1. The difference between a secured credit card and a debit card is that the secured card activities are reported to the bureau.

How does using a secured credit card repairs CIBIL score.

Timely payment of card bills is the most important prerequisite that is needed to build your credit score, through this process. The bank reports the payment behaviour to all the three credit bureaus. The payment details get recorded in your credit report and that forms a basis of your score. Since the payment history makes up 35% of your score, working on this aspect definitely gives a big boost to your score.

Remember, not using a secured credit card responsibly can bring down the score even further. So make sure you do not make any late payments, and do not default on them either. Do not use more than 30% of the available credit limit. A high credit utilization ratio pulls the score further down.

A secured credit card is a good option not only for people with a low credit score but also those whohave just started their journey of building credit. People with a lower monthly income, than the minimum income set by bank for issuing credit card can also use a secured card. Various banks like HDFC, Axis Bank, ICICI Bank, Dena Bank provide this facility. These banks allow a credit limit of 50% to 100% of the fixed deposit amount. But before you apply to any one of these banks for a secured credit card, remember to set your expectations right. You will not see overnight results. Just like all efforts take time to yield results, building a score also requires patience. It may take a few months before you start seeing any results. So you need patience and determination to start your journey. All the best !