What are the pros and cons of CIBIL score calculation

Your CIBIL score is a mirror to your credit health. For, the credit score calculation by CIBIL is totally based on history of your loans and repayments. The high score indicates high credit worthiness while the low score manifests low worthiness to pay back the loan.

The Maths behind CIBIL score calculation is primarily based on 5 factors:

1.      Repayment of loans: This single factor accounts for 35 % of credit score points. When you pay your utility bills, loan EMIs, credit card balance and other outstanding dues on time consistently month on month, it creates a very positive credit history. ‘No late payment’ appears in your credit report. It makes you credit worthy for future lenders.

2.      Credit utilization: Besides the repayment discipline, you also need to show that you are not credit hungry. It is important to not exhaust whole of your credit limit every month. When you use less than 50 % of credit facility available on your card you appear financially stable and this adds up to 30% points to score. Ideally you should use 20 %-30% of the limit. The best practice is to get rid of even the lowest of the credit balance every month before the due date.

3.      Mix of loans: The right mix of secured and unsecured loans is another factor that helps CIBIL gauge your credit score. If you have more unsecured loans and cards you are more risky to lend credit and this affects your score by 10 percent.

4.      Age of loans: The age of loans affects the score by 15 percent. For example, if you have availed education loan, car loan and personal loan, all in the last few months you tend to appear short of cash. Your loan to income ratio would show that you cannot re-pay more credit and thus the credit score will be low too.

5.      Enquiries: Too many bank queries in a short span also show that you have big credit appetite. So you should not make credit enquires to various channels in the same time. This accounts for 10 per cent of score.

The Pros of CIBIL Score Calculation

1.      The CIBIL score clearly reports about an individual’s credit creditworthiness. So, both the banks as well as customers gain with this knowledge. Based on the score bank gets to know about your repayment capabilities and you know about credit availability. A person with low score can either look for loans for bad credit score or work to improve the history before applying for new loan. Thus the score calculation basically brings transparency between the lender and the borrower.

2.      When you have a good score, you get potential power to negotiate and can easily rope in low interest personal loans, auto loans and credit cards. You can also vie for better card deals and loan offers.

3.      With high score, banks are confident about your repayment capabilities. So credit score calculation also leads to faster loan sanctions and saves time and effort of both the parties.

4.      As you tend to pay your loan and card balance on time to boost your score, you basically start practicing good financial discipline. This habit helps you build very good score in the long run and keeps financial troubles away in the future as well. With good score, credit is always available to you at your doorstep.

The Cons of credit score calculation

1.      To err is human, and error in the CIBIL score calculation is the only cons to the consumer. As every individual is too dependent on the score for approval of loan or credit card application, a single dispute or fault can hamper their credit prospects for future.

2.      It takes a long time to build the score and even longer to mend it. There is a provision of raising a dispute with CIBIL for any kind of technical error, misreporting or faulty information on your report. But it takes at least 15-30 days to get the correction done.

3.      Another drawback of CIBIL score calculation is when your score purges because of a third party default whom you signed as guarantor to. Herein, without being at fault you suffer low credit availability because of low score.

4.      With availability of credit report online, any fraudster can claim your report and enjoy credit on your name stealing your credit details. So it becomes all the more important to keep your confident documents safe from other people.

All in all credit score calculation, is a vital tool to access your credit power. However you need to be cautious to not let anyone ploy this tool against you.

Six things about Home Loan Tax incentives you didn't know

Irrespective of how much one earns one is always on the lookout of legitimate ways to save tax and this is true not only in our country but worldwide barring a few countries that have do not levy any income tax on their population. So if you have a home loan, there are numerous options available to you under the IT act that can help you save tax. There might be a few things about these sections that you might not be aware of; the discussion below focuses on six such aspects.

1.       The New Budget Allows You to Save Extra 50000!

As per the new provisions announced in the current budget additional rebate of Rs. 50000/annum on interest is available subject to certain conditions. This deduction is available for loans sanctioned in the coming financial year provided the value of the house is less than Rs. 50, 00,000 and the house loan amount does not exceed Rs. 35, 00,000. Thus first time buyers can now claim a total deduction on interest up to Rs. 250,000; this is Rs. 200,000 under section 24(b) and the additional 50,000 under section 80EE.

2.       Deduction on Interest is Available on Accrual Basis:

Interest calculation can be done either on paid basis or accrual basis. Paid means when it is actually paid while accrual is when it is due whether paid or not. Deduction on interest allowed u/s 24 is available on accrual basis; this means even if the borrower has missed paying one or more EMIs he/she can still claim the full deduction for the entire financial year as the interest was due, even if it were not paid on the said date. While not paying on time could put you on the loan defaulter list, it will not impact your tax deduction.

3.       You Need to be a Co-Borrower and a Co-owner as well to Claim Tax Deductions:

A joint home loan offers many benefits; enhanced loan eligibility and bigger tax break are two major ones. However if all applicants need to claim tax benefits then they need to be co-borrowers and well as co-owners. If only one person is paying the EMI then the other person despite being a co-owner cannot claim tax benefit. Similarly if the person sharing the EMI burden is not a co-owner then also he/she is not eligible to claim the tax benefits. The EMI sharing ratio decides the proportion in which tax deduction is available to the co-borrowers.

4.       Deduction Can Be Reversed!

If the property for which deduction under Section 80C towards principal repayment is claimed is sold before five years then the entire deduction claimed under the said section is reversed. This reversed amount is then added to the income for the year in which the property is sold. The silver lining here is that the rule does not apply to the deductions claimed for interest payment and generally in the initial years the EMIs bear a bigger interest component which is not reversed.

5.       Loans from Individuals also Eligible for Tax Breaks:

If for some reason like a low CIBIL Rating or lack of documentation one chooses to borrow from friends or relatives rather than the organized financial sector, then also tax deduction is available. Deduction u/s 24 towards interest repayment can be claimed provided the loan is taken for the purchase or construction of a house or a property. The interest rates applicable should be reasonable and a legal certificate needs to be provided by the lender to claim the deduction. The benefit allowed for tax deduction under the sections 80C and 80EE is not available if the borrower chooses to borrow from an individual.

6.       Other Charges are also Tax Deductible:

Apart from the principal repayment and interest other charges paid during the loan process can also be claimed for tax purpose. Thus charges like processing fee can also be claimed under Section 24 which also allows for claiming deduction for the interest paid on the loan. This is so because the processing which is paid for the service provided by the bank when processing the loan is treated as interest as per the definition in the IT Act.

The tax laws keep getting updated so it is important to keep yourself up to speed on them. Hopefully the above aspects can help you save a more tax on your house loan payments. 

How An Identity Fraud Can Ruin Your Cibil Score?

Identity fraud is always ravaging. The impostor not only steals away your personal information but casts a dark cloud of uncertain financial crisis for your future. And you are left with the list of unpaid credit bills and loans that were never drawn by you. The CIBIL Score bleeds out and the hope to enliven financial health is minimal.

Here is a guide on how an identity fraud can ruin your CIBIL Score and what are the best possible ways to protect yourself against such financial catastrophe?

Dangers of Identity Fraud

First of all, the impostor would use your personal details to make enquiries for loan and credit cards. Every time a new query is made to the bank, it will be reported to CIBIL. This will increase the number of hard enquires on your Credit Information Report. Multiple hard queries would affect the score badly.

As the scammer would succeed in opening a new account on your name, it will again add an account in your CIR. Next, due to non-payment the balance on your name would rise and hurt the score. Just a single month of delinquency can severely impact and result in a drop in CIBIL score.

The imposter can simply change the address and contact number to deceive you for longer period of time. By changing contact details, you would realise only after too much of loss is already incurred.

Not to forget credit cards here. These are even easier to misuse. If you have a really good CIBIL score, the impostor can easily apply for fresh credit cards such as instant approval credit cards on your name and keep on increasing dues for you.

As, they already have access to your other credit cards, they can misuse those as well. So not only your bills would skyrocket but your credit utilization ratio would also take a leap. The score thus is bound to hit the rock bottom levels due to following points:

1.            unpaid new debts

2.            increase in debt to income ratio

3.            increase in credit utilization ratio

4.            frequent enquires for fresh credit

All the factors collectively can ruin the score to irreparable levels.

Watch out credit report!

As prevention is always considered better than cure, you should always monitor your credit report thoroughly many times in a year. When you are alert, no impostor can ruin your financial health. Never ignore an unidentified action on your report- be it a query of a bank or an update in your personal data. Always notify CIBIL if you identify any unknown activity on your report.

Besides the report, you should personally be shrewd enough to not handle your documents to anyone without a strong reason. It is better to write the purpose of document while sharing there itself. Similarly ask for your documents back whenever the purpose is not resolved. Do not leave a copy of documents with anyone.

In fact do not share confidential information such as credit card numbers and other personal ID details on phone or chat windows. While submitting data online, check the authenticity of the website. Read the privacy policy to ensure that your data is not shared with the other parties.

It is also wise to keep photocopies of your cards with you so that you can block it anytime.

When you find traces of identity fraud

Whenever you discover an unidentified action in your report you should inform your bank and CIBIL about it. If the damage is yet to happen, you would save a real time financial crisis in your life.  However, in case of the mishap, you can only rely on the bank to help you track the credit transactions.

You should also contact the local police station in person and get the case filed. The cyber-crime team with the help of information provided by bank may solve the case for you.

You would also need to raise a CIBIL dispute so as to block your account for further damage. The damage caused by identity theft is not limited to one area. You would need to clear out all the disputes related to credit cards, loans and queries separately.

The process is lengthy and would take much of your hard work and time. You may also consider professional services to mend the credit history loss.

Relationship between CIBIL scores and loans

Loans are heavily dependent on CIBIL score. In fact, CIBIL score is the financial baggage, which always tags along with loans.

CIBIL score is a crucial and vital element for loans. It is why one faces rejection of loan for low CIBIL score. Most people are not even aware of their CIBIL score or something called as the “CIBIL score” until they face of rejection of loans for bad credit score. Loans and credit score is interlinked. One’s chances of getting a loan are directly proportional to his or her credit score. The lower the score, more probability of rejection of loan for low CIBIL score. The higher the score, the lesser the probabilities of rejection of loans for bad credit score.

The actual procedure:

Loan borrowing sounds simple. The procedure is indeed a cakewalk if you have done all the things right. An individual fills a loan application form for a desired bank. He hands over the form to the bank. The person’s bank inquires for the person’s credit report and score, and thus the tough part begins. If the person is eligible to receive a loan and he has a good credit score; the bank approves his loan application. On the other hand, if a person is eligible to get a loan but he has a bad credit score, then the bank will reject that person’s loan for low CIBIL score.

The lender’s point of view:

It is easy and illogical to blame lenders for rejecting loans for bad credit score. We all are aware but tend to overlook the fact that lenders are those wishful thinkers who really want people to take their loans. The reason why lenders sell loans to people is that they make money from the rate of interest one incurs. However, while evaluating loan applications, a lender likes to make sure that he is lending money to a responsible individual, someone who will be able to repay the same along with the defined interest. Nobody likes complicated things, not even lenders. The process is simple: Take the loan today and return it along with the interest tomorrow. Nobody wants to go running behind anyone or knocking people’s doors asking for money.

When banks approve people’s loan applications, they necessarily look for five things in the person’s credit report.

1.     Their Company Profile: Banks have a pre- approved list as to who is eligible for the loan and the credit card depending on their company profile. In case your profile in their list of the chosen profiles; your application will be approved.

2.     The Account Status Section – The account status section is of prime importance. It indicates any suits filed or any written off cases. This might affect your chances and this might be another reason for rejection apart from rejection of loans for bad credit score.

3.     Repayment Trend: One’s repayment trend is captured in their credit report. In case one has defaulted in his past, then that record will be evident in the 'Days Past Due' [DPD] field. This might be another reason for rejection apart from rejection of loan for bad credit score.

4.     Credit Score: It is noted and known that 79 percent loans are sanctioned to people with a CIBIL score greater than 750. It is crucial that one maintains a good credit score. Otherwise, they can face refusal of loan for low CIBIL score. One can always follow certain techniques and methods to improve their score. They can also take help from credit repair companies like Credit Sudhaar, who offer a plethora of services like credit health check up, score improvement module and free loan assistance and helps in preventing refusal of loan for low CIBIL score.

5.     EMI to Income ratio: This is simply the ratio of your EMI to your income.

 If (EMI/ Income ratio) < 50 percent, you have good chances of getting your loan approved. Otherwise, more chances of getting your loan rejected.

To make the logic simpler, let us understand the same with two examples.

1.     Imagine you have an income of Rs 50000. As per rule of thumb EMI to income ratio, your total borrowing capacity is only 50 percent of your salary. Lenders assume that you will require 50 percent of your salary to pay your living expenses. So, your total borrowing capacity in this case is 25000. Now, banks check for incremental EMI, which is borrowing capacity minus the EMI. Suppose your EMI amount is 10000. Thus, incremental EMI is 25000 – 10000 = 15000. Based on this, a total loan of 15,00,000 may be allocated to the person at the rate of 10 percent for 20 years. This application is likely to get accepted.

2.     Similarly, imagine a person with a salary of Rs 100000. As per rule of thumb EMI to income ratio, his total borrowing capacity is 50000. Now suppose the EMI amount is 50000. So the incremental EMI will be borrowing capacity minus the EMI = 50000 – 50000 = 0. Based on this figure, no loan can be sanctioned to the person. This kind of an application will most probably get rejected for a reason not equivalent to rejection of loan for low CIBIL score.

Yes, loans are heavily dependent on CIBIL score. And hence, it is significant that we maintain a healthy credit score. After all, when we apply for loan, we expect to receive “a loan” instead of being left “a lone” with nothing in hand.