Saturday, 20 December 2014

Credit score and youngsters

Westernisation is slowly taking its roots in India. Like western countries our country's youngsters are slowly moving towards becoming financially independent at a young age too. Also increasing is the importance of credit transactions in India. Nowadays almost all transactions involve the use of credit cards, unlike the earlier use of cash everywhere. Almost everything can be paid on line now with the help of credit cards. So everyone has a credit card these days. Therefore it is necessary for young adults to know about credit scores as these credit cards will impact their scores and low credit scores or no credit history may pose a hindrance in getting a loan approved in future. So it is advisable to start building credit responsibly as early as possible. The basic things for youngsters to know about building credit responsibly


Credit score& it’s Effects:
First and foremost try to understand what credit score is. Credit score is evaluating the probability of an individual paying back the money he/she borrows.

Your credit score affects a lot of factors in your financial life. Whether it is getting a loan or getting a job. If you are aiming for a job in Finance, almost all companies check your credit report. Your credit report could give you an edge over another applicant who is neck to neck with your job.
In loans, lenders calculate the credit risk from your credit report and then decide whether to give you loan. So the lower the score, the lower your chances of getting a loan.

Get a credit card:
Credit cards can be a good way in getting yourself a credit history. Because no credit history means no credit score. You could start with asking your parents to get yourself authorized in their card; their history will get added to your history. Or you could also get your own card-lots of student credit cards are available which have low credit and income requirements.  But keep in mind to use it sparingly. Don’t keep balances and interests pending. By doing all the payments responsibly you are slowing building a history of responsible use and maintain a good credit score.

Keep checking your credit reports:
Checking your credit reports at regular intervals is a very good habit to instil in young adults. Credit bureaus like CIBIL, Equifax, Experianand  maintain a record of individual’s credit activities and make credit reports. Checking your credit reports will help you in spotting any errors or mistakes in it and getting it fixed. Getting your mistakes fixed may take a few months, but it will be worth the effort in the future when you apply for loans.

Beware of Identity thefts:
If you are offered a credit card and the people in question are asking too much personal information be cautious you can get involved in identity theft. See to it that when you are providing information do it through a secure form online or in front of the company to whom you are providing. Don’t give away information where your information would lie down on a stack on the desk and anybody could access it. Know about the people who you are giving information to, find out whether they are trustworthy or not.

Friday, 19 December 2014

What Lenders see before giving a loan?

After you apply for a loan, lenders estimate your credit risk based on a number of factors, like your income, financial situation and credit/payment history. These factors also known as ‘5Cs’ are explained below:

Credit history:
Qualifying for any type of credit largely depends on your credit history- which is the line of credit you've made by making timely payments and managing your credit efficiently. Your credit report consists of your credit history based on the information provided by creditors who have extended credit to you at a point of time. While one credit reporting agency’s information may vary from the other, all of them usually have the same information i.e the types of credit, payment history, lender’s names who have extended credit to you and more.

The lenders may also use the credit score given in the credit report. It’s of numeric value based on the information provided in your credit report. It serves as an indicator for the creditors about the credit risk involved. Usually higher the credit score, lower is the risk.


Capital:
Household income is expected to be the primary source of repayment in the cases of loans but in the cases where the person loses the job or experiences setbacks, capital helps repay these loans. Capital is the investments, savings and other assets which can help in repaying the loan. Thus capital plays a factor in the lending decisions too.

Capacity:
Creditors need to ascertain whether you can manage your payments comfortably or not. Your employment history and past incomes are a good way to determine your ability to pay off outstanding debts. Type of income, stability and amount of income can be considered. Debt-to-income ratio (DTI) which is the ratio of your current and new debt, as compared to your before-tax income, can be evaluated.

Conditions: 
Your plans on how to use the money also forms a part of the lender’s decisions. The loan’s purpose on whether it is for purchasing property or a vehicle is considered. Other than purpose, economic and environmental conditions are also considered sometimes.

Collateral (secured loans):
Credit cards, lines of credit or loans can be secured or unsecured. In secured, like a home or an auto loan, something you own has to be pledged as collateral. Value of the collateral will be evaluated, and past debts already secured by that collateral has to be subtracted from its value. The remaining value will play a part in the lending decision.

 The 5Cs is a common term used in banking. Knowing these 5Cs would help you better in answering questions the next time you apply for loan.

Thursday, 18 December 2014

Ways to make business credit worthy

Is your business credit worthy is one of the main things asked when you apply for a loan or credit card. Here are some ways to make your business creditworthy-

Make yourself personally creditworthy:
Your personal credit score pays a big role in building your business creditworthiness. If it is low, you should focus on repairing it. Pay all your dues on time i.e. any past amounts which are due and/or also those in process of collection. Pay down any revolving balances on your credit cards and in future try to avoid carrying such debts. If that is not possible for you, then make sure you pay more than the minimum amount which is due and also make these payments on time.

Establish a separate business identity:
As and when your business starts getting settled and well established and you are looking for specific credit score for your business, then set up a separate business entity from your personal affairs. Get advice from your legal advisor or attorney on which would be the best possible legal structure for your business. Register for a federal tax ID or an EIN (employee identification no) in your state. Then lastly, establish a business banking relationship to segregate your business from your personal finances.

Establish separate credit record for business:
After you've set up a separate business identity for your business and been there for a while, you would like a separate credit record different from your personal credit record, for your business too and for this you need to apply for a separate credit card for your business.

Keep up with your business credit reports:
Most businessmen say they don’t get time to check their business credit reports when in reality they are just afraid to check them. You should not be afraid because the faster you would check the reports, the sooner you’ll be able repair them or fix any discrepancies you find. The credit reports should be checked at least annually to make sure there are no mistakes; if you have a frequently changing business situation then check them quarterly. Get your most recent credit report when applying for a loan. Look at reports from all the credit reporting agencies like CIBIL, Equifax, Experian because their information may differ.

Keep checking up with the credit rating:
Keep checking up with the credit rating about your reports. If you find any inaccuracies or error in your business credit reports, report to the credit bureau directly and challenge them.These bureau are supposed to contact the lenders with the incorrect information; the creditor would then, either contact the credit bureau and correct the information or would respond to you, explaining their reasons on why they do not agree with you on issue of the disputed payment.

When you settle this issue, your credit score is most likely to go up. However, keep checking it till it does.
                             Now that your credit score has improved it would also improve your credit worthiness. This credit line can be a safety net for your business, as it makes sure that you have required cash for your day to day business activities and for handling an emergency.

Wednesday, 17 December 2014

How bank analyzes your credit worthiness

Credit risk analysis is an integral part of how banks lend money. It is a highly standardized process that tries to assess the desirability of an account by estimating the profitability and reliability of that account. Credit investigations are conducted by the banks to minimize the possibilities of experiencing loss from delinquent and late payments.

Understanding these metrics and processes that these banks use can help you in developing an approach wherein you can maximize your credit worthiness and access financing and business credit rating more effectively. So how is this credit risk measured? Let us see below:

Credit Risk Analysis Metrics


Reliability
The measures of reliability used by the banks are references from past and current suppliers, owners or management’s qualitative character and credit payment history.

Ability to Pay
The applicant needs to demonstrate through business plans and financial models that he can generate consistent cash flows and enough revenue and that he is capable to make payments within the terms. This will also give the evidence that the business has been running for a certain time and will continue to operate successfully and keep paying its bills on time.

Economic Conditions
Industry and economic trends contribute to the bank’s assessments of risks and helps as an overall predictor of a business’s ability to maintain itself and recover its potentialities. If the industry is expanding rapidly, a successful credit arrangement goes on; conversely, the bank may be on more on the side of caution while considering a credit application, when the industry is shrinking.

Collateral
The most critical consideration in credit risk analysis is whether there is willingness by the borrower to back the desired loan or credit terms with an asset(s). If the bank is assured recourse to recover the losses via liquidation of the property of the applicant, then it is likely to feel secure in such an arrangement. In difficult economic conditions, secured loans and loans are much more common.

How Does Credit Risk Analysis Inform Lending Practices
Each metric’s importance can vary greatly from one applicant to another. Not only do these metrics help the lender whether to issue credit report or not, but they also influence the credit limit, payment terms and other additional assurances.


Tuesday, 16 December 2014

CIBIL score myths

There are various articles on the internet about the importance of maintaining a good CIBIL score to speed up your chances of getting a loan approval.But,more often than not this information may get confusing for the public. As a result, many of these people may go on about their works as usual, unaware that this indifference might cause a negative impact on their credit scores.

Nowadays it is extremely important to have a good CIBIL score. RBI has made it compulsory for all lenders to take into consideration the CIBIL report before making their credit approval decisions.

As we mentioned above,there is a lot of misinformation on the internet about maintaining the perfect score therefore we attempt to bust some common myths about the credit score below.


Higher income is the reason for higher Credit score:

CIBIL credit score gets affected by your credit behaviour, not your income. Irresponsible credit behaviour can be shown by high income groups which could lead to low credit scores.It is the length of credit history which helps in strengthening your credit score.

Checking your CIBIL score will have a negative impact on it:

It is said that enquiring about your CIBIL report or CIBIL score may get you a negative marking so many people avoid checking the score.This is quite opposite to what the truth is. infect checking your CIBIL report at least once a year is good financial practice.
Checking your own CIBIL score is considered as ‘soft enquiry’ and won’t have an impact on your score but if credit card issuers or lenders ask CIBIL to give access to your CIBIL report, it will be considered as ‘hard enquiry’ as it will get recorded in the enquiry section of your report.
Loan applications given to many banks at a point of time may lead to enquiries in quick succession which will be tagged as ‘credit hungry behavior’ which will have a negative impact on your score. However checking out your CIBIL report once a year, is like getting a health check.It won’t hurt you score at all.

No credit equals to a good CIBIL score:

Many Indians have grown up with the belief that it is a bad thing to live on credit. There are many of such people who avoid loans and credit cards like the plague and assume their credit score would be perfect because they are not using credit.These people are more in the line of fire than those who hurt their score by over-leveraging themselves.
The people who don’t borrow don’t have a credit history and thus, they cannot be assigned a credit score by any of the credit bureaus. These people would then find it hard to get a loan. Therefore ,it is better to use credit responsibly than have no credit history at all.
Having a credit or taking loans is a good thing as long as you keep making timely repayments.This helps you in maintaining a good CIBIL score and is considered as good financial behaviour.

There is only one credit bureau that maintains your records:

Even those people who know about credit report and credit score think there is only CIBIL that keeps financial records. When in fact there are three other credit bureaus other than CIBIL. They are Equifax Credit Information Services Pvt. Ltd, CRIF High Mark Credit Information Services Pvt. Ltd ,Experian Credit Information Co. of India Pvt. Ltd.
This means that when you apply for a credit card or loans, the lender may get your credit report and your credit score from CIBIL or any of these institutions. All these bureaus have different scoring models, so your score can differ from one bureau to another.But, even though their scoring models may differ, these scores are highly correlated.So if your credit behaviour is considered good by one it will considered good by the others too.

Conclusion

Responsible use of credit and low credit utilization rate have a good effect on your CIBIL score. If you are doing this then you don’t have to worry when you are in need for credit.

Monday, 15 December 2014

Loan rejected despite of high CIBIL score? Read This

Having a high credit score is a must for lending banks but it does not guarantee the loan approval. Other than credit score, there are also other factors considered before granting a loan. Eligibility and quantum of loan to be given depends on different parameters and criteria which may differ from bank to bank.

Approving of your loan application depends highly on your CIBIL credit score. But a host of other factors are required for your loan application approval process too. The reasons for rejection of a loan are:


Overleveraged:
You are expected to have at least 40% of your income towards everyday living expenses. When you are paying more than 60% of your income towards various dues i.e. car loans, home loans & credit card card bills or have way too many active loans, you are considered to be “overleveraged” by banks,
Though your CIBIL score may be above average(because you are applying for more credit) and you would be prompt in paying your loans you would still be rejected since banks consider you as “overleveraged”.

CIBIL report having Derogatory remarks: 
Your credit report is plagued with derogatory remarks such as "Settled “and "Written Off" status. Financial institutions(NBFC’s) and Banks are cautious when lending money to individuals who have such derogatory remarks on their report because such remarks indicate that you didn't pay off the payment in past transactions or if you did make the payment you did not pay it in full. Most banking agents will insist that you go with a "Settlement" with the bank as you won't have to pay the full amount, but don’t get lured and always go for a full closure.

Credit Hungry:
When we are in urgent need of money, we do the mistake of applying in multiple banks and financial institutions all at once. For example, if are applying for a loan in Bank P, Q as well as R. You will think that the other bank will not be aware of you applying in the other two banks. But this is a wrong thinking because every application will be recorded as an enquiry for credit.

Now, this could result into: your CIBIL score being lowered by at least 10 – 17 points (approximately) every time you even enquire for loans. And also this will give the impression to your lenders that you are always borrowing beyond your comfort level.

Guaranteeing a defaulter:  
As a guarantor of the loan you are equally liable to pay the loan as is the borrower. If you are the guarantor for a loan which is showing late payment pattern or has been settled with the bank with partial repayments, your loan gets affected too, for guaranteeing a defaulter.

Do not have adequate taxpaying history:
If for some reason you have recently started filling returns then the bank may reject your loan application. Banks usually need at least two years worth of income tax to be filed by the borrowers they consider favorable.


Saturday, 13 December 2014

Factors impacting your CIBIL score

With banks and RBI becoming more and more stringent about the loan eligibility of borrowers, it is imperative to have a good CIBIL score in order to qualify for a loan with an attractive rate of interest.

Maintaining a good credit history is needed to have a good CIBIL score, the details of which will show up in your CIBIL report. Based on how your credit is been serviced, the CIBIL score can then be compared to a grade or a rank.

The study of the link between credit history and credit score will help to keep your CIBIL credit score as high as possible. Here is a low-down on the factors that have the greatest impact on your CIBIL score.


Repayment history:
The first and most important thing that impacts your credit score is your repayment history. In order to maintain a good repayment history, all the bills and loan repayments should be cleared well within the dates stipulated. Even a single default has a negative impact on your score. It accounts for 35 per cent of your credit score.

What you owe to lenders:
Calculating what you owe your lenders is referred to as credit utilization. There are two basic consideration- First is the total of your credit card limits sanctioned to you and secondly the percentage of your money which you are utilizing. Your credit utilization ratio is thus calculated as balance outstanding on all your credit cards as a percentage of total credit limits on all your credit cards. If your credit utilization ratio is more, your profile is considered to be "risky".

How long have you been servicing debt:
The amount of time for which you have been using credit has an important bearing on your credit score. Therefore, if you have been servicing debt for a longer period of time and making timely repayments etc., it will have a positive impact on your CIBIL score.

Amount of new credit taken or applied for:
The banks and other financial institutions run an inquiry on your CIBIL report every time you apply for a new credit such as a loan, credit card etc- to check your credit history, to find out about your financial health and repayment capability. If there have been too many such inquiries on your CIBIL report, it has a negative bearing on your credit score. . It accounts for 10 per cent of your credit score.

The mix of credit:
This factor has a bearing of 10 per cent on your CIBIL score. In order to score high on this ground, you must have a healthy mix of credit comprising of secured and unsecured loans and must have ability to service them well in time. Those with a mix of various credit types such as mortgage, personal loan, car loan, credit card etc. are likely to score higher than those who have a single type of credit.

These factors can be used to improve your credit score. A good credit score will ensure that you get a loan without any hassles at best interest rates when you really need one.