4 important mistakes to avoid when handling credit – Tips for borrowers


Shanthala Chits has always advocated the judicious use of credit while managing finances. The reason for this is the inherent financial difficulties and risks which borrowers face when their borrowing plans go wrong. Especially in uncertain times like the present, when stable incomes cannot be taken for granted, it is easy to fall back upon credit. But though credit would serve the immediate need, it may lead to several undesirable consequences in the future.

Personal loans, auto loans, home loans, business loans, working capital loans, credit cards, instalment purchase, bank overdraft – these are all various forms of credit. However the underlying principle is the same. Borrow a little now, but pay back so much more than you borrow. And if you fail to pay back in between, face the risk of punitive action. It may be drastically higher interest rates, coercion from loan collectors, public humiliation or even legal consequences. There are some common missteps which borrowers may take that can lead them into such dangers. Please take care to avoid them.

1. Missing a payment

Loans have a sizable EMI liability falling upon the borrower. When he misses even one payment instalment, the rate of interest on his borrowing increases drastically. Credit cards users commonly misunderstand the “Minimum Amount Due” in their monthly bills. They simply pay this minimum amount and let things slide. But just within a few months, they will see their net liability increase manifold. That is because the remaining amount due is now liable for exorbitant rates of interest. Most credit cards charge between 3-4% per month, which is a whopping 40% annual interest! Bank overdrafts are typically in the range of 9-12%.

2. Not tracking their credit worthiness

Depending on each borrowers’ total loan liability and repayment track record, his credit score is computed. This numerical score is used by banks and financial institutions to evaluate whether the borrower is a safe customer to lend to or not. Borrowers who don’t take adequate steps to improve their credit score stand the risk of being denied loans when they badly need them. A credit score is a numerical value that represents how credit worthy you are. A credit score is a 3-digit number that ranges from 300-900. As a convention, a credit score of 750 and above is considered a good one. That means, our chances of getting a loan are higher if your credit score is above 750.

3. Pledging collaterals for securing loans

No bank nor financial institution wants to take the risk of giving a loan to an unsecured borrower. So they insist on some sort of guarantee. It may be a property hypothecation, personal guarantors who can vouch for the borrower, gold collaterals, etc. So that, in the situation where the borrower defaults on payments, the bank can evoke the collateral and safeguard their principal. When it comes to corporate loans, the personal wealth of the directors are also subject to this recovery process. We have seen so many high profile loan defaulters in the news recently, being dragged into court and their wealth being confiscated due to loan default. Whether it is for friends or family, signing up as a personal guarantor for some borrower is a risky step. It is important to verify all repayment clauses and personal liabilities before offering to do so.

4. Ignoring the terms and conditions 

Before lending the money, the financial institution makes the borrower sign an elaborate loan agreement with stringent terms and conditions mentioned in great detail. Most borrowers, in their eagerness to borrow, ignore reading through these terms carefully. Many times, borrowers simply sign on an empty form and allow the loan processing agent to fill up the form! This is a dangerous mistake. Because when things go wrong and the borrower is forced to default on the loan, the financial institution has the full powers to enforce all the terms signed up for. There is no point in pleading ignorance at that time. Reading the fine print before signing is the borrower’s responsibility.

Taking careful precautions to avoid falling into a credit trap is a must for any borrower. If not, all carefully made financial plans will get completely derailed and borrowers will find themselves in a perilous situation. Poor credit management has been the cause of many people getting into mental depression or attempting suicide, due the mental stress it causes and damage it does to the family.

But what if you do not have to borrow at all? What if you can arrange for meeting your expenses without getting into debt and being burdened by ever increasing interest liabilities? Sounds good? It’s very much possible, just requires a little bit of advanced planning and smart decision making.

Chit Funds – an attractive alternative for borrowers to raise money

A financial instrument which can serve as a viable alternative for many of your financial needs is chit funds. Chit funds may sound like a completely different kind of financial instrument. But in many ways, chit funds can help you in getting rid of the credit card/loan debt trap. How, you may ask. A quick summary below:

  • Chit funds by design are a dual purpose financial instrument. They are an easy mode of saving as well as borrowing.
  • For known expenses that you are likely to incur in the short to medium term, you can plough in your excess revenue into an appropriate chit fund scheme for a tenure of 2-3 years. So when it’s time for the actual expense, your money is ready to use! No debt, no interest.
  • If in the mean-time, you are faced with a financial emergency, the chit fund gives you a quick liquidity option to tide over the crisis.
  • In a chit fund scheme, even if you pull out the entire amount early, your monthly payments cover both the principal and interest. Thus leaving you debt free at the end of the tenure.

Interested? Want more information? Get in touch with us. We will be glad to help.

About Us

Shanthala Chits has been in the business of chit funds for over 2 decades now. We are a Government approved chit fund company with a 25 year successful track record and thousands of satisfied customers. Shanthala Chits is registered under the Chit Fund Act of 1982, Government of Karnataka. We are one of the most popular chit fund houses based out of Bengaluru, known for our customer satisfaction and secure investments. Get in touch with us and start with an investment scheme. We will be glad to help you out with the right scheme that matches your needs.

Anuradha C

Anuradha is a freelance writer cum corporate trainer in the IT/telecom domain with over 18 years experience. She served in senior technical and management positions in Huawei and TCS for 10+ years. Then gave up the traditional corporate ladder to go solo - in order to escape horrendous city traffic and to be at her own boss!
Anuradha C

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