Thursday, 30 June 2016

Know the classification of debts

Debt, in simple words, is the money that you owe to an individual, financial institution etc. There are different kinds of debt and not all debts are the same. The most common kinds of debt include home loan, credit card debt, education loan and car loan. Debt is used by people for making big purchases which they may not be able to afford under normal circumstances. Lending institutions expect borrowers to repay back the borrowed sum by a certain period of time, along with interest. Different creditors use different means of getting their money back. Hence, it is important to understand the terms and conditions as well as the power a creditor holds.

Debts can be classified into secured and unsecured. Secured debt is a debt that is secured by a collateral, such as a home loan or a car loan. This kind of debt brings down the risk that is associated with lending. The lender has every right to take over your collateral, such as your home or car, if you fail to repay back the loan. You will never become the full owner of the asset tied to the secured debt until you have managed to repay back the loan. It is important to remember that home and car loan aren’t the only kind of secured debts. Secured credit card is also a form of secured debt. A secured credit card is a kind of credit card where your savings account will serve as a collateral on the credit available. There are a number of different issuers in the market offering secured card to clients. Most of the people opting for a secured credit card are doing so as they believe it is one of the answers to how to improve CIBIL score. If you are looking at different ways on how to improve CIBIL score, getting a secured credit card may be a good option.
Unsecured debt is a debt that has been extended to a borrower without a collateral. Credit card debts (excluding secured credit card) tend to fall under this category. If you have opted for an unsecured debt, your property cannot be taken away if you are unable to repay back the money. However, financial institutions may take other actions against you for failure to repay back the loaned sum. They can either take you to court or hire a debt collector, who may force you into paying back the money. They will also report you to the credit bureau so that the delinquent payment status will be shown on your CIBIL report.

Debts can also be classified depending on the time period for which money is borrowed - short term, medium term and long term. A short term debt is one that has to be repaid within three to nine months from the date of borrowing. Intermediate or medium term debts are those that have to be repaid in five years or so; and long term debts are those that may be taken for ten years or more and is used to meet the long term needs. Debts can also be differentiated depending on how you decide to pay every month - revolving or instalment. Under the instalment debt, you would have to pay a fixed amount each month eg. home loan. A revolving debt, on the hand, does not have a fixed monthly payment. Credit card debts are the most common kind of revolving debts.

The manner in which you handle your debts, play a big role in building your credit image among the financial institutions. Making timely repayments is one of the solutions to how to improve CIBIL score. It is of utmost importance that you pay all your outstanding dues and have nothing left pending. Avoid missing any payments as these get listed on your credit report. Also, balancing out your debt portfolio is another way on how to improve CIBIL score. If you must keep unsecured debt, try and maintain it at 20% and the rest 80% in secured debt. Lastly, if you have several debts try and consolidate them. This helps to keep track of the payments, thereby bringing down the chances of missing any. Now that we have looked at the different ways on how to improve CIBIL score, it is important to put them into practice at the earliest. Remember, the way in which you manage your debts speak a lot about well you can handle finances. It is one of the first things creditors want to learn about you. So make it a good one!

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