Thursday, 15 November 2018

Don’t ignore 5 things while using Credit Cards

Credit cards are a blessing in today’s time as they help in managing our finances in a much better way. But one needs to manage this tool carefully in order to prevent sinking into a deb trap. Good credit behaviour and avoiding mistakes is necessary to ensure that the credit card helps us in improving our credit score. A good score goes a long way in establishing our credibility. It makes it easy for us to borrow money in future. Here are 5 things that one must not ignore while using the credit cards.
Don’t carry a balance on the card
The card issuer requires you to pay only minimum monthly balance on the card bill every month. It is usually only 5% of the bill amount. But one should not resort to this practice. The longer you take to clear you dues, the more interest you will have to pay on it. Since the credit card interest rates are very high, carrying a balance will soon put you in a debt trap. The interest amount will keep piling up and soon become more than the actual principal amount. If you simultaneously make new purchases the next month then things will get out of control. Hence one should charge only those expenses to the card that one is able to pay at the end of the month. Do not buy items that you won’t buy normally if you had only cash to spend. It is always better to plan out a budget and stick to it, so that you don’t tend to overspend using your credit card.
Don’t miss your payment
Staying current on your payments is of utmost important if you wish to maintain a good CIBIL score. Payment history accounts for 35% of the credit score. Missing payments not only attracts a late payment fee but is also responsible for a low CIBIL score. The late payment record stays on your report for seven years. If you tend to forget the due dates, then the best way to stay on top of payments is to either use Google Calendar or just use automatic payments. If you are unable to pay the entire balance, it is better to pay at least the minimum due amount, than skipping the payment entirely. If you find yourself in a financial crisis then do not ignore your bills completely. The interest will keep piling up and soon become unmanageable. It is better to talk to the credit card issuer to renegotiate the terms. You may try to negotiate a deal and come out with a payment plan that would allow you to pay your dues.
Don’t over utilize your credit limit
Paying the credit card balances in full each month does not guarantee a good CIBIL score. 30% of the score is also based on the credit utilization factor. It is calculated by dividing the amount of credit utilized with the total available credit limit. One must not exceed 20% to 30% of the limit in order to keep the credit score in good shape. A person who is in a habit of maxing out credit cards every month will have a very high credit utilization ratio.

Don’t close old credit cards
The longer the credit history, the better it is for your score. Old credit cards help in increasing the average age of your accounts and hence help in improving your score. So do not close your old credit card even if you are not using them anymore. The credit limit available on these cards help in improving your credit utilization ratio.
Don’t ignore your credit card statements
One must carefully review the credit card statements every month to check and verify the transactions. Any charges that you do not recognize should be dealt with immediately. A monthly review helps in uncovering identity theft cases. Apart from this, the card holders must also review the credit report regularly to see how their credit card usage behaviour is affecting their credit score.
If you take care of the above 5 things, you will be on the right path to ensure that your credit card usage affects your score positively.

Monday, 5 November 2018

How to deal with increase in home loan interest rates?

A home loan is a long term financial commitment as its tenure extends from 10 to 25 years. There are a lot of external factors like inflation, crude oil prices, rupee value and global economic condition that affect the rate of interests. If you have a home loan in your portfolio and if you have chosen a floating interest rate then these external factors will have an indirect effect on your personal finances.
If RBI decides to hike the rates and the bank with which you have a loan decides to pass on the hike to its existing customers then you need to devise a strategy to deal with this change. There are several ways in which you can deal with the impact of rise in the interest rates.
Increase the EMI amount- Home loans EMIs usually take up a substantial percentage of a family budget. A hike in the interest rate will change the total cost of the loan. Instead of extending the loan tenure if you can accommodate an extra amount in the budget (without affecting your other financial goals), then it is a good decision to increase the EMI amount that you pay every month. Sometimes it is much better to increase the EMI amount than to invest your savings. If the rate of interest you are paying on home loan is higher than what you would get as return on investing the savings, then increasing the EMI amount is a better option.
Increase the tenure- There may be situations where you do not feel that you can budget an extra amount of EMI. In those cases increasing the tenure of the loan, while keeping the EMI amount same can be the only option. However, if you do so, the cost of the loan in the form of interest outgo increases.
Balance transfer- Another way of dealing with the situation is to shift to a different lender who is charging a lower rate of interest. Tell your existing lender about your intentions. Most banks do not wish to lose their old customers, and try to accommodate their requirements in order to retain them in this cut throat competition. If you have paid attention to the factors that affect CIBIL score calculation, then you will have a high credit score. Use this weapon and try to negotiate with them so as to avoid the hassle involved in switching to another bank. If you do plan to switch you must first compare the cost involved with the savings that you will derive, to understand whether it is wise to do so or not.
Partial prepayment of loan – If one has some surplus funds or if one is expecting a bonus in the near future, then those can be used to make a partial pre-payment of home loan. If there is no prepayment penalty, it is a good way to bring down the principal outstanding amount. If the borrower keeps the EMI amount same, then prepayments will help him in servicing the loan faster than the agreed upon tenure. It will also reduce the overall cost of the loan. Prepayments however should not be done at the cost of saving for emergencies. One must not sacrifice the corpus created to meet short term goals, otherwise one would need to take loans at a high rate of interest in order to meet them.
Switch to fixed rate home loan- A fixed interest rate definitely provides more stability to your financial life. If adjustments to floating interest changes are difficult for you to handle, you may think of switching to a fixed rate home loan. You can explore this option depending upon the outstanding loan amount and remaining tenure of loan that you have. But remember fixed rate is usually higher than the current floating rate, so you will need to do a cost benefit analysis to decide whether it is really in your interest to make a switch. If you are close to final repayment date, then it may not be justified to make the switch.
Before deciding on a particular strategy analyse every aspect of your financial portfolio. You should adopt the measure that best suits your budget and financial situation. Remember, you do not want to get into additional debts at a higher rate of interest, just to save on interest cost of home loan.