When an urgent need to borrow money arises, most of us either take a loan or use our credit card to fulfil that need. As a borrower, we are at the mercy of the bank or financial institution, and we have to prove to them that we are capable of making the repayments promptly.
Don’t get fooled by the number of spam calls you get on your phone, with people offering personal loans and credit cards. It’s just the first step to lure you in. The moment you show willingness, the company will do their due diligence and start verifying your credentials.
So how does a loan provider or credit card company ascertain whether it makes sound economic sense to lend money to you? A popular concept called a CREDIT SCORE has been introduced for this purpose.
Earlier, the loan disbursement officer in charge would individually evaluate each borrower’s financial position and then decide whether to approve or reject your loan request. But with a credit score, your financial position is automatically evaluated without any individual’s involvement. This process reduces arbitrariness and scope for manipulation.
Answers to some of the common queries and concerns which borrowers may have about credit scores are addressed below.
Q) What is a Credit Score? Who calculates them?
A) 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.
It is calculated by the four credit bureaus in the country- TransUnion CIBIL, Equifax, Experian Credit Information Company and High Mark Credit Information Service. Each credit bureau has its own proprietary algorithm that is used to compute the credit scores. CIBIL scores are the most popular is India.
Q) What is considered a good credit score?
A) 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. Your credit score is not a fixed, one time score. It will keep varying with your financial activity. For instance, you take a loan and repay it on time, your score goes up. You default on your credit card payment, your score will fall. It is recommended to generate your credit score roughly once a quarter, if you are looking to borrow money.
Q) What are the factors based on which credit score is evaluated?
A) Though the individual algorithms of credit agencies may vary, most of them broadly evaluate your credit score based on the following factors. Some factors are more important to satisfy than the others, the factors below are listed according to their order of importance.
- Repayment record – How prompt are you with your repayments matters the most for maintaining a healthy credit score. Even one payment default affects the score. Credit card repayments and loan EMI repayments are the main components. Bills payments like electricity, mobile etc are not counted.
- Credit Utilisation Ratio – How much of the available credit limit have you utilized, that matters too. If you have a credit limit of 1Lakh on your credit card, and your credit card spending is around Rs 60000, then your credit utilization ratio is quite high, at 60%. This will reflect badly on the credit score.
- History with credit – A new borrower is always difficult to evaluate, because the financial institution cannot easily predict whether you are going to make prompt repayments or not. If you have a history of regular repayments and no defaults, then you can get a new loan much more easily as your credit score reflects your good history with credit.
- Number of credit accounts held – When a borrower has multiple loans or credit cards, it means their credit burden is very high. Such a borrower is considered as a higher risk, so their credit score reflects this fact.
- Credit Mix – A credit card is considered as an unsecured loan, whereas a home loan or vehicle loan is secured as it is against a collateral. The sum total of all types of borrowings represents your credit mix.
Q) How can a borrower improve their credit score?
A) Here are some important pointers that can help a borrower to maintain a healthy credit score.
- Pay your EMIs and credit card dues on time. Setting a Standing Instruction for automatic payment of EMI is the best way to ensure that prompt repayments happen.
- Never borrow more than 30-40% of your credit limit. Maintaining a healthy credit utilization ratio is important.
- Keep your credit score up to date. Generate it before seeking a loan, as latest figures will have more weightage.
- Do not increase your credit card limit unless it is unavoidable. A large unsecured outstanding balance will hurt your credit worthiness.
- Avoid credit stacking. Using one loan to repay another or using multiple credit cards to clear payments, these are to be strictly avoided.
MAINTAIN A HEALTHY CREDIT SCORE. FOLLOW A DISCIPLINED REPAYMENT SCHEDULE. BORROW AS LITTLE AS POSSIBLE. THAT’S THE QUICK TAKEAWAY FOR ALL BORROWERS.
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.
Shanthala Chits is 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.
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