Is Your Credit Score Healthy Enough?
Dec 14, 2010

Author: PersonalFN Content & Research Team

How to be a smart borrower?

Introduction

With Christmas and New Years fast approaching, we are around the corner from the holiday season and it is this time of year that you’re probably planning an annual vacation, or gifts for your loved ones.

While it is certainly a time of joy, it is also a time of increased spending.

If you are one of the many people making use of your credit card to fund your holiday spending, and not worrying about repayment, here are some facts to bear in mind, that will keep your credit score healthy.

This article will tell you how to be a smart borrower i.e. how to know your credit score, how to keep it high, or make it higher than it is, and give you 3 top tips to get out of too much debt and keep your credit score healthy. Let’s start at the beginning.

What is a Credit Score?

Your Credit Score is a score that is provided by a credit information company (for example companies such as CIBIL, Equifax, HighMark) to a prospective lending institution, that will tell the lender how good or bad a borrower you have been.

The clear indication is that the higher your credit score, the better a borrower you are. This means that you probably make your payments on time. Hence lenders that lend to you face a lower risk that you will default. And vice versa - the lower your credit score, the higher the risk that you will default.

A score of 78% is considered a ‘Good’ credit score to have, while a score of 83% or higher earns you the proud tag of ‘Excellent’. A score of less than 70% means that if you want a credit card or want to take a loan, you are probably going to face a difficult time. As the situation stands today, lenders will restrict you if your score is poor by possibly charging you a higher rate of interest on a loan, but sadly they are yet to reward those borrowers who have a high credit score.

How Do I Find Out My Credit Score?

The Credit Information Bureau of India Limited (aka CIBIL) will give you your credit score; you just have to follow the simple steps given on the CIBIL website (http://www.cibil.com/accesscredit.htm).

There is a nominal fee of Rs. 142, which is non refundable.

If My Credit Score is Low, How Do I Fix It?

There’s no shortcut here. Those individuals who have a low credit score due to poor borrower behavior in the past, can improve their credit scores by paying their dues on time, repaying any late pending dues, and ensuring that they do not default on any payments in the future. It will take time, but small sure steps will definitely raise the score.

If your credit score is low not due to past indiscipline but due to an error on the part of a lending institution or on the part of CIBIL, do notify both the institution and CIBIL immediately.

Who Can Help Me Get Out of Debt and Fix My Credit Score?

If you have built up too much debt and don’t know how to handle it, your score is almost certainly suffering. Repaying your debt and emerging from the debt trap should be your first priority. Doing so will automatically improve your score.

There are credit counseling organizations that can help you fix your debt situation. These agencies are typically non-profit organizations, so fees are minimal, if there are fees at all. A credit counseling agency will create a debt management plan for you, aka a DMP, negotiate with the lender on your behalf, and try and get you a lower rate of interest to repay your pending debt. You will also receive some peace of mind, simply knowing that you are not alone in your repayment of debt.

For both situations i.e. correcting an error or getting out of a debt trap, you can contact Abhay (started by the Bank of India – but handles cases of all individuals regardless of whether you are a BoI customer or not), or Disha Trust (started by ICICI Bank – which will also help all individuals), or any other credit counseling agency you deem fit to help you out.

Your 3 Top Tips

We promised you 3 top tips that will keep you out of debt trouble and keep your credit score healthy, and here they are:

Make your debt payments on time and regularly. This will have the most significant impact on your credit score.

Try and avoid having more than 2 credit cards. This will ensure that you don’t keep credit limits that you don’t really require.

If you are planning on taking a new credit card or a new loan, do it in a short span of time – don’t drag out the process. If you stretch the process over months, it will look like you have spent a lot of your time seeking credit, and this will reflect negatively. Do your research quickly, and take the loan.

To make sure you don’t take more debt than you can handle, have a Financial Plan in place. One of the many benefits of a Financial Plan is that it will show you how your cash flows are structured year on year, and accordingly you will know how much EMI you can afford to pay in the coming years.

For more information on Financial Planning, do feel free to Contact Us.

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Comments
mateusz.klagisz@gmail.com Jun 17, 2012 Please do not consolidate. It is not free, they will lower your payments by increasing the length of time until you are debt free, and you will take a hit on your credit score. There is a better way.A. Have a garage sale and sell anything that you no longer need or want.B.Get a temporary part time job, if you have one, get another. The holidays are coming and there will be plenty of temporary jobs available. It is better to have a no fun year or two than a no fun decade. Here is a plan that can help you. If you work the plan, the plan will work for you:1. Make a budget. Make the budget a week before you get paid. A budget is not a punishment! It is a tool which will free you from ever having to worry about money again. Put everything in your budget. Especially those annual, biannual, or quarterly bills like car registration, insurance, etc. Give every dollar you are going to bring home the name of where it is going. Add an emergency fund category to your budget for 25 dollars and save up until you have 1000-1250 dollars. Your emergency fund will help keep you from getting into new debt because of an emergency. If you can, set up a direct transfer to a savings account for your emergency fund. That way it moves automatically and you don't even have to worry about it. You must cut your spending and live on less than you make.2.First get current on all of you debts and make no more late pamyents. Stop using your credit cards immediately. Do not take on any more debt. Credit cards are like quicksand only the death is much slower. Make a list of all of your debts in order of highest interest rate to lowest interest. Use cash only for your spending from now on.3.Pay the minimum due on all of your debts and then put your extra money towards paying off the highest interest one first. After you get that one paid off, you put the money you were paying on debt #1 (the minimum payment and the extra payment) towards debt #2. That will pay debt #2 off faster. When that is paid off, you put all three pamyents towards card #3 and that one will be paid off pretty quickly. As an example:To start :Debt #1 (highest interest): minimum payment+ extra paymentDebt #2 (middle interest): minimum paymentDebt #3(lowest interest): minimum paymentDebt #1: paid offDebt #2: minimum payment from Debt #1+ Minimum payment from Debt #2 +extra paymentDebt #3: minimum paymentDebt #1: paid offDebt #2: paid offDebt #3:Mimimum payment from card #1+ minimum payment from Debt #2+ minimum payment from Debt #3+ extra payment.That way, you will get them all paid off, on time, and pay the least interest. It will also help towards rebuilding your credit since you will no longer have any late pamyents. This works no matter how many different debts you may have.4. After you get all of your debts paid off, add to your emergency fund until you have 6-12 months of income saved up. Put that emergency fund money into a liquid money market fund or into a Bank of America no-risk CD so that if you need the money you can take it out without penalty.5a. When you have your emergency fund in place, add a category for fun to your budget. Save for a holiday, a vacation, a big screen, or dinners out, whatever goal you want. Remember to enjoy your life.5b. When you have your emergency fund in place, start saving for your retirement. Join the 401(k) plan at work and contribute the maximum. Your employer probably matches at least part of your contribution so why give up free money? Open a Roth IRA and contribute the maximum on a monthly basis. If you start saving for your retirement now, you will probably retire a millionaire.5c. When you have your emergency fund in place, start saving for your next car. Only buy cars, or other things that depreciate, with cash. Save up for a nicer car. That way you get the interest instead of paying the interest.You can do it and it isn't as hard as you think. Just follow the plan.

Comments

mateusz.klagisz@gmail.com
Jun 17, 2012

Please do not consolidate. It is not free, they will lower your payments by increasing the length of time until you are debt free, and you will take a hit on your credit score. There is a better way.A. Have a garage sale and sell anything that you no longer need or want.B.Get a temporary part time job, if you have one, get another. The holidays are coming and there will be plenty of temporary jobs available. It is better to have a no fun year or two than a no fun decade. Here is a plan that can help you. If you work the plan, the plan will work for you:1. Make a budget. Make the budget a week before you get paid. A budget is not a punishment! It is a tool which will free you from ever having to worry about money again. Put everything in your budget. Especially those annual, biannual, or quarterly bills like car registration, insurance, etc. Give every dollar you are going to bring home the name of where it is going. Add an emergency fund category to your budget for 25 dollars and save up until you have 1000-1250 dollars. Your emergency fund will help keep you from getting into new debt because of an emergency. If you can, set up a direct transfer to a savings account for your emergency fund. That way it moves automatically and you don't even have to worry about it. You must cut your spending and live on less than you make.2.First get current on all of you debts and make no more late pamyents. Stop using your credit cards immediately. Do not take on any more debt. Credit cards are like quicksand only the death is much slower. Make a list of all of your debts in order of highest interest rate to lowest interest. Use cash only for your spending from now on.3.Pay the minimum due on all of your debts and then put your extra money towards paying off the highest interest one first. After you get that one paid off, you put the money you were paying on debt #1 (the minimum payment and the extra payment) towards debt #2. That will pay debt #2 off faster. When that is paid off, you put all three pamyents towards card #3 and that one will be paid off pretty quickly. As an example:To start :Debt #1 (highest interest): minimum payment+ extra paymentDebt #2 (middle interest): minimum paymentDebt #3(lowest interest): minimum paymentDebt #1: paid offDebt #2: minimum payment from Debt #1+ Minimum payment from Debt #2 +extra paymentDebt #3: minimum paymentDebt #1: paid offDebt #2: paid offDebt #3:Mimimum payment from card #1+ minimum payment from Debt #2+ minimum payment from Debt #3+ extra payment.That way, you will get them all paid off, on time, and pay the least interest. It will also help towards rebuilding your credit since you will no longer have any late pamyents. This works no matter how many different debts you may have.4. After you get all of your debts paid off, add to your emergency fund until you have 6-12 months of income saved up. Put that emergency fund money into a liquid money market fund or into a Bank of America no-risk CD so that if you need the money you can take it out without penalty.5a. When you have your emergency fund in place, add a category for fun to your budget. Save for a holiday, a vacation, a big screen, or dinners out, whatever goal you want. Remember to enjoy your life.5b. When you have your emergency fund in place, start saving for your retirement. Join the 401(k) plan at work and contribute the maximum. Your employer probably matches at least part of your contribution so why give up free money? Open a Roth IRA and contribute the maximum on a monthly basis. If you start saving for your retirement now, you will probably retire a millionaire.5c. When you have your emergency fund in place, start saving for your next car. Only buy cars, or other things that depreciate, with cash. Save up for a nicer car. That way you get the interest instead of paying the interest.You can do it and it isn't as hard as you think. Just follow the plan.