What Is A Credit Score?

You are planning to take a loan for the most favorite car you had thought once buying or a house you always had imagined or the business you wished to expand, would take you to a journey of going to banks, making inquiries, checking the best quote and the interest rate offered to you and then finally deciding which option would suit you the best in terms of tenor, rate of interest, processing fees and pre-payment charges. Now the point is, how do banks or non-banking financial institutions decide the rate of interest or other charges? What are the criteria?

Suppose you and your friend went to a bank. You both earn almost the same, your age is same, the family background is also similar. And you both apply for the same loan is the same bank. But you were offered 11.5% interest rate whereas your friend was offered 10.25% interest rate with little lesser processing fees and pre-payment charges. Now that would make you think if the external factor looks the same, why are the other things different? So you finally decide to know the details deeply of why your friend was given lower rates than you. And here would be the analysis of what you would get.

You had never done a CIBIL Score Check. Which is one of the major factor of the interest rates being processed? Lower the credit score more is the interest rate and vice-versa. The credit score ranges from 300-900. Where 300 is the lowest and 900 is the highest. Any sore beyond 750 is considered a good score. People below this score are considered red zoned, and the one above 750 are greed zoned. It’s not that, if you have a score below 750 you will not get a loan, but the % of interest will be higher. Now let us take into consideration that why is the score low or high? Basically, what are the factors that decide the score? There are 5 factors whose combination results in the score.

  1. Payment History (35%)

The major factor which determined your credit score is the payment history. How well-organized you are in making the payments of the credits you have taken, shows how responsible you are. Banks can make a note of your previous payments and decide if you will be an asset for them or not. If previously you have made blunders in payments or didn’t pay regularly, the score dips badly and makes it difficult for you to get a loan. If the score is not good, and it’s becoming difficult for you to get a loan; in that case, you can try for loans for bad credit. But ultimately the loss will be yours only.

  1. Amount owed (30%)

The total amount which is taken by you, in any means of the credit i.e. by credit card or a loan also has second major thing determined in the score. The amount of the revolving credit and the fixed credit is in the amount owed.

  1. Length of credit history (15%)

How long is your credit account active, and how old is your account also determines your score. Some people make the mistake of closing the older accounts thinking they are not of any use but that creates a dip in the score. So,  keep the accounts active.

  1. Types of Credits (10%)

There are 2 types of credit. Fixed or installment based credit and revolving credit with a mix of secured and unsecured credit. The type of credit you have will also contribute in the score. It’s healthy if you have a good mix of all types of credit.

  1. New Credit (10%)

The new credits you take is also a determining factor of your score. New credit means you are becoming more responsible towards your repaying responsibility. But do not overdo, else this would also hamper your score.

Always manage the credits you take responsibly. If you check your score and you feel there is some mistake, get a detailed report and check. Work with that diligently and patiently to get your score in green zone!

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Will Arranging My Debts Help Boosting My Credit Score?

A credit report provides a comprehensive picture about one’s credit position. The credit score which is an important part of the report factors in various variables when calculating the score and this rating helps in predicting an individual’s creditworthiness. In case you have a low score then there could be a variety of reasons for it and depending on the problem you can solve it using various solutions. Arranging your debt can help you in boosting your credit score. Let us consider a few ways in which arranging yore debt can give a boost to your credit score.

  • Consider Balance Transfer:

Balance transfer is an option that can help in better management of debt. This option can be useful both for home loans and in case of piled up credit card debt.

Home Loans run for long tenures and it is possible that during this time the interest rates change a couple of times. If you realize that the loan you took years back is at a higher rate than the current prevalent rate for home loans in the market then you could consider getting a home loan balance transfer after weighing the costs and benefits. A lower interest rate could help lower you over all liability and you may find it easier to pay your reduced installments in case you are struggling with the repayment. Longer loan tenure if agreed by the new lender can also help you in repayment.

Credit card debt is the most expensive form of credit. If you are struggling with repaying your credit card dues then balance transfer could help you. In this process you transfer your unpaid dues on one card to another card (preferably one that charges a lower interest rate), the new card company provides some interest free holiday before you need to start repaying your dues which can help the card holder. The acquiring card company may also allow repayment in EMIs which can help in boosting your score.

  • Fore-Closure Could Help in Certain Cases:

All loans and credit card dues are included in the CIBIL Report, one aspect that influences credit score calculation is the balance between secured and unsecured loan. In case your unsecured loan (personal loan, credit card dues) burden is higher than secured loan burden then it could impact your credit score negatively. In such a scenario fore-closing these (unsecured) loan could help in boosting the credit score. Though loans that run the full course are better for the credit rating in the long run but in some instances a prepayment may help.

  • Prioritize your Debt

Needless to say repaying all your dues on time and regularly is important. However if you have too much debt and are struggling with repaying them then you must consider prioritizing the repayment. Repaying one which has the highest interest burden could be a good way to start. However it is important that you list out all your debt along with their interest, overdue amount and remaining amount. If you find it tough to repay all you monthly dues then you could talk to lenders and request a loan restructuring. Here the loan tenure is increased which lowers the EMIs and makes it easier for you pay your monthly dues. You aim should be not to allow interest fee and penalties to add to your debt burden. This is definitely not one of the ways to improve credit score fast but could give you results in the long term.

Ideally one should not reach a position where their debt burden becomes so high that they find it difficult to repay their monthly dues. However in case this does happen then you should consider rearranging your debt in an attempt to better your credit rating.

3 Ways Parents Could Accidentally Harm Their Child’s Credit

Credit health is as important as your mental or physical health. However many a times we realize the significance of credit health only when it is hurt. A low credit score hurts your credit worth and makes you ineligible to advance the loans.

Let’s find out some of the common mistakes which hurt the score in the beginning of credit building cycle of an individual. Herein we would focus on 3 ways parents accidentally harm their children’s credit report.

  1. Multiple Student Loans
    The escalating costs of school and college fee is one of the major reasons why student loans are as much a fad as a necessity for young aspirants. The parents who fail to incur adequate research on the matter and avail a high cost loan for the purpose, certainly build a huge financial burden right in the beginning of their child’s credit life cycle.

    Many people mindlessly raise multiple loans for students owing to availability of credit facility at lower rate. With enormous amount of debt it would be a huge responsibility for a student to repay a loan after completing their education. As a parent, it is your duty to calculate total fee amount and try to look for the least expensive way to finance your child’s education.

    You also need to build the healthy habit of saving funds in your child. As a parent, it boils down on you to inculcate good financial habits in your child. Raising too much of loan for their education would not be a smart decision if it results in low CIBIL score.

  2. Share your credit cards
    Excessive spending is another key reason for impending balance on credit cards. Before handing over a credit card to a young mind, it is important to help them understand the importance of not having huge balance at the end of every month.

    Being a parent you can also add the kid as your credit card account holder. It will sometimes help them to improve their CIBIL score. But maintaining good credit behaviour would be a must. As an adult you need to ensure that regular payments are processed on time and there is no balance after the due date. Remember your child is most likely to follow your footsteps. If you are not serious about repaying your bills on time, the child is also not likely to pay attention to deadlines. You would seriously challenge your child’s future with bad credit habits.

  3. Credit education
    If you fail to teach right knowledge about finances and credit to your child it is your failure as a parent. You need to make the young mind understand the important aspects related to money management and ways to improve CIBIL score. The first credit lesson starts from home. You need to make the child understand how credit affects their life. You need to make them understand the importance of credit for their education, job to buying a home or car.

You need to teach them how important it is to monitor their credit score multiple times in a year. It is important to let them know how information in their credit report will impact their credit score.

Educate them about the available resources to obtain a free annual report. You can choose to review it along with them so that they learn the intricacies of maintaining a good score. You need to help your child develop a mindset that it is easier to maintain credit health rather than fixing bad history later on.

Last but not the least, do not forget to talk about identity theft threats. For online it is one of the fastest-growing crimes. They should know that sensitive information related to account should not be shared with anyone outside.