Need loans at a low rate of interest? Maintain a high credit score!

Credit score

Credit score or CIBIL score is the numerical representation of one’s credit history. The credit score or CIBIL score is sourced from credit bureaus. The score can range from 300 to 900, 300 being the lowest and 900 being the highest score.

Banks always aim to offer loans at a low rate of interest. But no matter how low of an interest rate the banks offer, the customer always wants better. What many people don’t know is that they can get loans at a lower rate of interest just by maintaining a good credit score. Yes, it’s as simple as that. Your credit score has the ability to get you loans at a lower rate of interest without any hassle.

Connection between credit score and loan eligibility

Your credit score is one of the important things banks look at when they consider your loan application. A credit score indicates your credit worthiness and your ability to repay the loan. If you have a bad credit score, the bank can reject your application right away even if you do fulfil all the other eligibility criteria. Your credit score plays a very imperative role when it comes to deciding your eligibility for a loan. Banks and financial institutions use the credit score to assess the risk posed by lending money to the applicant and to mitigate losses due to bad debt.

How can a high credit score get loans at a lower rate of interest?

Every bank has a cut off on the credit score of the applicant for the loan. The bank decides the interest rate and price of the loan depending on the risk profile of the applicant obtained from credit/CIBIL score. A customer with a low credit score will be granted a loan with a higher rate of interest while a customer with a good credit score of about 750 will be granted loan at a competitive rate of interest. The reason why the lender prices the loan high for the customer with bad credit score is because of the possibility that they might default on the loan. So it is very important to maintain a good credit score.

Three steps for credit newbies to get the ball rolling

If you’ve never taken credit before, your credit score with the country’s leading credit information bureau – CIBIL – will read NH, meaning “No History”. Banks and lenders tend to avoid “NH” applications because of their potential for default and the direct losses the bank will experience as a result. The only way to get credit is to have a good credit history or score – and the only way to get a good credit history or score is by taking credit. It’s kind of a catch 22 situation, but doing these 3 simple things can get you started on the road to financial freedom by slowly helping you build a positive credit record:

1. Use credit cards carefully: For someone with no credit history, getting a secured credit card is easy and highly useful. But the mistake most new borrowers make is to use their credit cards irresponsibly, by delaying payments and making impulse purchases.

Judicious and careful use of your credit card can take you a long way in building and maintaining a good credit rating and will make you eligible for loans and greater avenues of credit in the future. Whenever you make a purchase, ensure that you will have the funds to pay it off before the due date. If you miss making the payment by even just one day, there will be fines, charges and penalties levied which will damage not only your credit rating, but your financial health as well.

Secured credit cards can be acquired by applying for one against the security of a fixed deposit with the same bank. There will be a minimum deposit amount that will need to be maintained. Using this card regularly for small to medium purchases and paying off the entire amount well before the due date will contribute greatly to your credit score.

2. Stand as a guarantor or co-applicant for loans: Standing as guarantor means that you are just as responsible for the debt as the applicant. Details of the loan, its repayment and all other specifics are reported to the credit information bureaus for both people, and will reflect in both credit reports. Ensure that the person whose loan you’re guaranteeing is a person you can trust, and one who is responsible with money, as a default on the primary applicant’s part can leave you in the lurch and destroy your creditworthiness.
   

A successful loan repayment will guarantee positive credit ratings for the applicant and guarantor alike, and can be an argument used in your favour if your loan application is ever denied on the grounds of a less-than-favourable credit rating.

3. Monitor credit reports: Many people who do everything right and think their credit report is positive are usually in for a nasty shock when they receive their actual credit rating. There have been a number of cases reported wherein the credit information bureaus receive faulty information that reflects negatively in credit reports – this can happen due to a number of reasons including negligence on the part of credit information partners. To make sure that all the details mentioned in your CIBIL report and absolutely true, request a copy of your credit report once every 6 months and immediately correct any errors that you find. If you plan on borrowing heavily in the future, a clean credit report is absolutely vital.

There are many more ways you can build your credit report up to be a reflection of your outstanding ability to manage debt – but you need to be diligent and meticulous in your financial planning. It isn’t hard to do, and the reward is all the credit you need. Lenders will, of course, expect you to behave with the new credit with the same care and control as you did with older, smaller loans.

Managing finances is important, and managing your CIBIL credit score and making sure it always shows you in a good light can be considered a vital offshoot of judicious financial planning. Many employers these days are looking at a stable and well-maintained credit report as an indicator of stability and trustworthiness while reviewing job applications.

If your credit history is non-existent, don’t let it worry you – as you are perfectly poised to write an excellent credit history for yourself on a clean slate.

How credit score can impact your employment

The western economies have been considering a person’s credit profile before hiring. The companies consider a bad credit score as an irresponsible behaviour of an individual. The person’s inability to pay the bills on time shows that he is not capable of taking care of things. The companies run a credit check just like they would check for criminal history as it will affect the employer’s reputation as well.

Credit check has become a part of the background check which is done by the human resource team of the employers. A bad credit score is implied as bad intentions in general. If the applicant has ‘settled’ stated across the credit cards, then the HR tries to stay away from such candidates. It is also believed that the people in a high level of debt cannot work efficiently and therefore will not deliver the best results.

It can be argued that those who have been victims of identity theft and wrong entry in the credit report are wrongly judged. Even though this is true, the IT companies are also seen accessing the credit report while running a background check of a candidate. The list of sectors that will run a credit check keeps increasing. The best thing to do is to be aware of your credit score and thoroughly read your credit report.

It is important that you check your credit score and credit report once in a year at least. Access the credit score before you are applying for a job. Check for discrepancies and if you find any, report it to the credit bureau. Check if appropriate actions are taken with the bank and the credit bureau. This doesn’t end there, you need to follow up and see if the matter has been resolved. If this is the case, then you have a valid explanation and make sure that you bring it to the notice of the Human Resource of the company that you are applying at. This will help the Human Resource to take an informed decision rather than simply rejecting your application. 

Though the companies are referring to your credit score, it is not the only deciding factor for a person to get a job. If your credit score is good, then it is only going to improve the prospects of you landing a job that you prefer. A good credit score puts you in a good position. So, pay your loans on time and keep a tab on your credit score and fix it if they are bad. Keep an eye out for false and wrong credit information. IF you find discrepancies, report it to the bureau and take corrective measures and clear it out with the bank and the credit bureau. Follow up on your complaints and check if they have been resolved. 

Companies are now checking the Credit score and report to judge a person’s stability and efficiency. However, the reasoning is held against the victims of identity theft and if there was a wrong entry. But, then they can be resolved.

Reasons to access your credit report

We are always stressing about having a good credit history and a good CIBIL score when we are in need of a loan. Most often we think that it is enough if we have all the documents in place while applying for the loan. But that is not enough, we need to access your CIBIL report and CIBIL TransUnion Score before we are applying for the loan to check where we stand.

According to Harshala Chandorkar, senior vice president- Consumers Services and Communications at CIBIL, CIBIL report and the CIBIL TransUnion Score is a testimony of your financial discipline to banks and financial institutions for approval of your credit card or loan application. A healthy credit report and Free CIBIL Score is an indication that you manage your finances well. 

Why is it important for you to access your credit report often?

• You are always ‘loan ready’

CIBIL report contains information about your income to debt ratio as well as your credit history. This is one of the important parameters that come into factor during the loan approval process. So, before you are applying for a loan it is important that you check your credit eligibility and do your homework. Calculate how much your income to debt ratio is and also aware of your credit history and credit score. Read through the whole report and check if there is any reason for having a low credit score or any other factor such as loan settlement and find ways to correct it and increase your credit score before applying for the loan. The report will prepare you for the unpleasant surprises that you get when your loan is rejected.

• Helps you manage your accounts

The CIBIL report will help you keep a tab on the loan and credit card accounts and helps you monitor the loan performance. It also helps you to keep track of the loans that you have co-applied for and guaranteed. You can also keep a tab on the supplementary credit cards. You will not have to individually check for the status of your loans as all this information is provided on a single platform.

• Run an accuracy check of your credit history

In a place like India, there are many people with similar names and there is a good chance that the data might be accumulated wrongly under your name. So, by accessing your CIBIL report, you can look for discrepancies. There is a huge data being collected and there might be a slight error in the way it is being recorded, but that small error might cost you a good credit score. When you access the report, look for discrepancies and have them corrected through the CIBIL online dispute resolution forum. When you are applying for a loan, the wrong information could be a major deciding factor for the lender to offer you the loan and the lender might reject your application on a ground that is incorrect and when the lender rejects your loan application, it again lowers your credit score.

• Credit health check-up

CIBIL report provides you the insights to your financial health and how much debt you hold and how it is being repaid and gives you the exact number of times you have applied for a loan and a credit card. It will also have a record of the loans that you have settled and loans that were written off or if you have a suit filed against any of the loan account. When you run a credit health check-up, you can find corrective and preventive measures and help maintain a healthy credit report.

• Help you negotiate

The lenders mainly depend on your CIBIL report and CIBIL TransUnion Score to decide the terms and conditions of the loan. When you have a good credit score, you have the leverage to bargain on the terms of the loan and it serves as a powerful collateral and is an added advantage when you know that you are an ideal person that the lenders prefer to give credit.

Lookout for the best bank deposits

With the bank’s revising their interest rates offered on fixed deposits, it has become hard to work out which banks are offering the best interest rates on fixed deposits.

The banks began cutting down the interest rates on fixed deposits towards the end of 2014 as the Reserve Bank of India cut rates by 75 basis points. Across one to five years, most banks lowered their interest rates by 50 to 75 basis points. Few banks like Canara bank, Punjab National Bank, Indian Overseas Bank, United Bank of India, Vijaya Bank and Oriental Bank of Commerce have made deeper cuts. Canara Bank reduced the interest rate on deposits of one to five years from 9 percent to 8 percent in the past four months. Since the interest rates are on a downward cycle, further rate cuts are expected. Lakshmi Vilas Bank fixed deposits and Karur Vysya Bank fixed deposits are offering the best rates.

Longer term deposits’ options

Investing in a longer term deposit makes sense at this stage as shorter term deposits will offer you less interest on the money you will invest. In case you have no immediate need, then consider investing in deposits from three years to less than five years. For the three to less than five year term, Lakshmi Vilas Bank fixed deposits and DCB Bank fixed deposits are currently offering the highest interest rate at 8.6 percent. It also offers fixed deposits for a minimum opening balance of Rs.100. the interest is compounded on a quarterly basis for the cumulative deposits made. The interest pay-out option is also made available. DCB has a minimum deposit of Rs.10,000 and if you are choosing the cumulative option, then the interest will be compounded. DCB deposits can be opened online.

Karur Vysya Bank on the other hand offer slightly lower rates on their fixed deposits. The bank offers 8.5 percent for the three year time frame deposits. Currently, it is hard to predict how the interest cycle will unfold and it is not wise to opt for fixed deposits for tenures of five years and above. It is also advisable to go for a cumulative option if you require a regular monthly cash flow.

Shorter term deposits

It is ideal to invest for at least three years. Lakshmi Vilas Bank will pay 8.6 percent interest for deposits of one year and above. DCB offers 8.55 percent interest for deposits between 12 and 24 months. Karur Vysya Bank, Andhra Bank and TMB will offer you 8.5 percent interest on one to two year deposits.

Then there are also the special deposits schemes that will offer higher rates. TMB’s has 555-day deposit that gives 8.6 percent interest and State Bank of Patiala offers 8.52 percent interest on one to 555 days deposits.

Why fixed deposits are a good choice?

FD (Fixed deposits) are the safest and simplest form of financial instruments. The interest rate on fixed deposits are higher than that offered on savings account. Some banks offer loans against Fixed Deposit Certificates at competitive interest rate. Some banks also offer credit card with the credit limit up to the amount of the fixed deposit amount. Fixed deposits are permitted for up to 10 years only. The longer the term period, higher is the interest rate provided the repo rates don’t fall. The companies nowadays offer company fixed deposits. But these are not regulated by the RBI.

Company Fixed Deposits are deposits placed by investors with companies for a fixed period of time at an agreed rate of interest. The Financial Institutions and Non-Banking Finance Companies accept the Company Fixed Deposits. They are mobilised by the government under the Section 58A. They are unsecured deposits and therefore if the company defaults, the investor cannot sell the documents to recover the capital. Thus making it a risky investment decision. Company fixed deposits are provided when the companies need cash flow but cannot issue shares, they offer fixed deposits at profitable rates. 

The yield on your deposits vary from individual to individual. You can earn higher interest than that of your colleague as u are in a higher tax bracket and the investment returns are less. You need to optimise the fixed deposits’ utilisation. It can be done through building an emergency fund by opening a fixed deposit account. The money kept aside for emergencies can also earn returns. When a person is setting up new investment base, it is advised that he open a deposit account rather than taking credit. The fixed deposit will appreciate his income potential. By investing in deposits, the individual is ensuring that he has a safety cushion of money to back him up.

When you are investing do not end up investing in high risk investments such as moving investments in equity sector, commodities or even real estate for that matter. You can instead even it out with investing in bank or company fixed deposits. If you wish to save taxes, then you can invest for fixed deposits in your parent’s names as long as they don’t have taxable income. The interest earned on the fixed deposit is tax-free for up to Rs.2 lakhs and up to Rs.2.5 lakhs if they are senior citizens. Senior citizens also earn 0.25% to 0.5% additional interest on the fixed deposits. You can also invest in your eldest child’s name and save interest up to Rs.2 lakhs as it is tax-free.

Fixed deposits also play an important role in the consolidation of investments when you approach retirement. When you are retired, you don’t really have a fixed source of income other than pension. That is when fixed deposits play a pivotal role. You can invest in fixed deposits for different tenure to meet you various financial needs in the future.

But, be very careful when you choose the bank to invest your fixed deposits in as the small co-operative banks may not be able to secure your money at the time of bankruptcy. The rule is that the bank must secure each investors for up to Rs.1 lakh per investor per bank. But, the company fixed deposits do not have any assurance as they are not regulated by the Reserve Bank of India. Keep in mind that the company fixed deposit are unsecure and you have no collateral. But since the risk is higher, the interest rate is also higher. Exercise caution before investing.

Why Non-Convertible Debentures beats Company Fixed deposit

An NCD might not ring a bell in the minds of most Indian investors but is quite popular in the western world. The concept of issuing NCD’s is relatively new to India, having been first issued by SBI in 2008-09 to retail investors. The bonds are listed on BSE/NSE retail debt terminal.

Why ncd beats company fixed deposit from Sathish Mithun

Advantages of investing in NCD’s v/s Bank/Corporate Deposits

1. ·         NCD’s are in demat form- eliminates hassle of maintenance and safety of physical certificates.
2. ·         NCD’s can be traded- The bonds issued under public offer are listed on the BSE/NSE. Absence of lock in period ensures the investor can exit before maturity.
3. ·         No TDS Deduction- Since the bonds are in demat form and are listed there is no TDS.
4. ·         Opportunity to earn profit- The bonds are listed and traded on the market, which gives an opportunity to trade and earn profits. The value of these bonds is inversely proportional to the interest rates in the economy.
5. ·         Secure- Unlike Bank deposits which can generally be insured upto a certain limit, around Rs.1 lakh in most cases, NCD’s are secure in nature.
6. ·         Pledging of NCD’s- Bonds can be pledged with banks/NBFC’s to avail a loan or overdraft facility.
7. ·         Flexibility in tenure of maturity- The tenure of NCD’s could range from less than a year to 30 years. This acts as a buffer against reinvestment risk and also offers a steady source of income through interest.
8. ·         Earn interest income till date of transaction- If an investor sells the bonds before their maturity he/she will get the accrued interest till the date of the sale.
9. ·         Multiple interest payment options- An investor has the option to choose either cumulative payment or regular payment on interest.
10. ·         No settlement risk- The transactions are confirmed off-market but are settled on the NSE/BSE platform, thus eliminating settlement risk.