Credit Score

It is derived from the 'accounts' and 'enquiries' sections of your Credit Information Report. Different credit agencies have different marking systems. For instance, CIBIL's scores ranges from 300 to 900 points while Equifax India's ranges from 1 to 999 points. The closer your score is to the upper limit, the better. Sometimes, one may get a score of NA or NH, meaning you're either new to the credit system or you're in the ownership category where you have access to credit but aren't responsible for paying back the loan. So lenders may hesitate to give you a loan if you don't have a credit record.

Financial Institutions check your credit score before extending you a loan. Apart from common mistakes, here are some moves that affect your credit. So beware

TOO MANY CARDS

Bankers won't like it if you are 'credit hungry'. Applying for too many loans within a short period or having too many credit cards can go against you and may spoil your chances of getting a loan. This is because it is a sign of desperation and will have a negative impact as well. Access to multiple lines of credit, which may include unused credit cards, also impacts the score as it signals over-indebtedness.

GUARANTEE WITH CARE

Don't be surprised if your application is rejected if your friend did not repay a loan you stood guarantee to. Credit information bureaus classify ownership of a loan, that is, the responsibility of repaying, into four categories -- single/individual (you are solely responsible for paying), joint (you share responsibility with someone), authorised user (when you have access to credit but are responsible for paying, as in add-on credit cards) and guarantor (when you guarantee to honour the obligation if loan taker cannot repay). So if you have guaranteed a loan and it hasn't been paid on time, it will impact your score. Keep track of add-on credit cards and monitor joint accounts as the other holder's negligence can impact your access to credit.

CROSSING LIMITS

Frequent use of full credit card limit will be a red flag for lenders. The figure appearing under Current Balances of the "Account(s)" section of your credit report helps the loan provider evaluate whether you'll be able to pay additional EMIs. A lower balance means you have a better change of repaying the loan. While high credit card spending may not necessarily be bad, an increase in the current balance on the card over time indicates a higher repayment burden and may negatively impact the score. Your repayment pattern and track records also influence the score. The payment history appears in the "Account(s)" section of your credit report. The Days Past Due, or DPD, shows how many days a payment is late that month. Lenders view anything other than zero negatively.

MORTGAGE MIX

Things such as how old your lines of credit are and the quality of the mix can make a huge difference. Credit is categorised into secured loans (backed by collateral) and unsecured loans (not backed by collateral). Loans that create an asset, for instance a business, house are considered secured, while credit taken for consumption, such as personal loan or credit card spending, is unsecured. A high share of unsecured credit affects the customer's profile. This is because this means large payouts are due owing to the high interest rates on these loans. Therefore, chances of default are higher.

GHOSTS FROM THE PAST

Ignoring discrepancies in credit information reports or credit card and loan repayment records may come back to haunt you later. If you spot a mistake, you can either approach the lender or a credit information company to get it rectified. However, it is better to approach the bank as a credit information company can't make any change in the report unless it gets the lender's written approval. So don't overlook on anything which you think is not right.

FOR THE FUTURE

Though, as of now, mobile phone bill payments do not get captured in the credit information, there is a possibility of it getting included in the near future. According to the Credit Information Companies Regulation Act of 2005, telecom companies are allowed to access an individual's credit report. However, there is no provision for telecom companies sharing data with credit information companies. So do not overlook this bill so that you will be able to meet the future requirements of your credit scores if regulation do get updated. To keep this account pristine, comply with current rules and use all official channels to settle disputes rather than just refusing to pay your bill.

Being a Guarantor

Should you be a guarantor ?

Take on the financial commitment only if you have the ability to repay a loan if the borrower defaults.

Guaranteeing a loan is vastly different from signing a document as a witness. When you agree to become a guarantor for a loan, you are making a financial commitment, one that should be done only after considering all the aspects. This is important because if the borrower defaults on the payment, the responsibility of the loan has to be borne by the guarantor. In such a case, there is little a guarantor can do except talk to the lender and try to make a settlement for future payments of the remaining debt

When a person signs on as a guarantor, he becomes as liable to repay the loan as the principal borrower. According to the law, if the borrower defaults and is untraceable, the guarantor has to pay the outstanding debt. If need be, his assets can be sold to clear the debt.

Banks insist on guarantors for the loans in which there is no appropriate collateral, such as education and business loans.For other loans too, banks can insist on one, especially if the borrower does not have a good credit history. Other instances where a guarantor is needed are if the borrower has a transferable job or one which involves frequent travel abroad. It's also necessary when the loan is applied for in a city other than the one that is the applicant's permanent address.

While a guarantor need not service a loan on a monthly basis, the loan repayment can have an impact on his credit history. In case of a default, not only will he be asked by the financial institution to pay, but a default on his part while repayment the loan will also be reported to the credit bureaus.

Even if the EMIs are being paid regularly and on time, the relationship of the guarantor and the borrower could affect his own borrowing capacity. For instance, if a friend is a guarantor, he will be able to take a loan independently. However, if the guarantor has a closer relationship, such as a wife, she will have to shoulder a quasi liability. The means that if she wants to take a loan, her borrowing capacity will be calculated after accounting for the original loan that is being repaid.

Also, the liability of the guarantor usually terminates only after the loan has been fully repaid. If you are signing up for a home loan guarantor, be prepared that it will impact all your other financial borrowings for the next 10-20 years. So if you do want to help someone in need, it would be better to opt for short-term loans, such as car and education loans. 

In case you want to be relieved of your responsibility as a guarantor, review the guarantee deed and conditions of revocation. Usually, you can revoke it by giving a notice in writing to the lenders as well as  the borrower. The lender will then check the borrower's financial condition and the original arrangement. However, relieving a guarantor is solely on the lender's discretion. The bank's rationale is that the guarantor cannot shirk his responsibility mid-way as he had initially offered the guarantee for the full tenure of the loan.

However, revocation can be considered in certain cases. You can opt for it if an additional loan has been granted to the borrower without your consent, such as a top-up loan. You will, however, only be relived of the second loan and will be liable until the original amount of the loan has been repaid. The other options include you providing a substitute guarantor with the consent of borrower, or prepayment of the loan by the borrower.

New Education Loan

Now, take a loan to pay school fee. With this new facility, you can avail of loans ranging from Rs 30,000 - Rs 4 lakh from specific banks for classes up to senior secondary.

It's very likely that the fee your parents paid to educate you from kindergarten till graduation is less than the annual fee that you pay for your child's playschool today. In a metro city, a playschool can make you poorer by Rs 35000 - 1 lakh a year, while primary and secondary education in a private school can cost between Rs 50000 and Rs 5 lakh a year.

Paying such high fees could be a problem if you face a financial crisis, but there's no way you can remove your child from school, can you ? Now, you can resolve this dilemma by simply stepping into a bank. Yes, banks have started offering education loans for children's school fees, a phenomenon that took off about a year ago.

Loan Criteria

Earlier, education loans were offered only for professional courses. Now, you can take them to pay the school fees for classes ranging from nursery to senior secondary. The banks that offer this facility include public sector entities, such as Bank of Baroda, Central Bank of India, State Bank of Hyderabad and J&K Bank, others to follow soon. The loan amount varies from Rs 30000 - 1 lakh, but the Bank of Baroda has an upper limit of Rs 4 lakh. Though you don't need an account with these banks to avail such facility, account holders are given preference. Another condition is that the school should be affiliated to ICSE, CBSE or any state education board.

The loan is primarily meant to fund the tuition fee, but it can also be used to pay for other expenses, such as buying a laptop or any apparatus that may be required for projects.  However, in such a case, the equipment will remain in the bank's name as security till the total amount is paid.

Cost of Loan

Another option to tide over the difficult period is taking a personal loan, but this comes with a high rate of interest, which ranges from 14-19% and can go up to 24% in certain situations. On the other hand, an education loan is available at 12-13%. Despite that fact that both are unsecured loans, the one for education is cheaper.

Funding for coaching

Coaching classes, which help students prepare for various entrance exams, have become a vital part of the education system. Now one can approach the banks as they provide loans for coaching taken for professional courses. So, students appearing for entrance exams for civil services, medicine, chartered accountancy, engineering, etc, can opt for this loan. However it comes with certain conditions. A caveat is that you have to appear for the entrance exam of a recognized course, otherwise you will not be eligible for the loan.

Confusion over tax

According to Section 80E of the Income Tax Act, the interest that you pay on an education load is a deductible expense. Earlier, only the loan taken to fund professional course came under this ambit. This has been amended from the assessment year 2010-11 to include vocational courses pursued after passing the senior secondary exam.

However, there is some confusion about the inclusion of coaching classes. Typically, one can't claim tax deduction for coaching fees. However, under Section 80E, it is suggested that a loan taken for the purpose of higher education be available for tax exemption. So, it is possible to claim an exemption on the loan taken for coaching classes. This is in contrast to Section 80C, where tuition fee is specifically mentioned.

Loan Defaults

When Banks take your Cash 

If you default on your payments, the bank can withdraw money from your savings account or fixed deposits

Did you know that banks can hold your money hostage? Well, they can, and the ransom you have to pay to get your money back: clear all outstanding dues. Banks have devised a clever way of ensuring that customers clear credit card dues and repay loans on time. If you default for several months, the bank can deduct money from your savings accounts or refuse to pay money from the fixed deposit when it matures.

No, banks aren't trying to con you. What they are doing is perfectly legal. In fact, they have your permission to do so. You don't remember giving it, do you? But you did when you signed on the dotted line while availing of the loan or the credit card and accepted the terms and conditions (T&C). The fine print will have a statement similar to this: "I hereby grant and confirm the existence of the right of lien and set-off with the Bank, which it may use anytime to utilize any money belonging to me and deposited with the bank, towards any outstanding dues".

All this legalese simply means that the bank has the right to deduct money from your account. Any collateral that the bank can legitimately hold can be held back. Of course, if your T&C does not state this, the bank cannot touch your money. Banks can't debit unless you agreed that such measure can be taken while taking a loan. However, if you have signed on the loan contract and it mentions that the assets can be adjusted, then they can.

So, if you aren't careful about clearing all your dues with the bank, you might find yourself bankrupt.

If you think you can avoid such a situation by opening a second account, you still won't be able to get away. You can't default on one account and get away by keeping to the straight and narrow on the other. In fact, the bank can lock any account of yours, even if it is with another bank. If a bank wants to lien an account of the defaulting customer with another bank they can do so by filling for a garnishing order. You cannot question this right as the money belongs to the bank.

However, some accounts and facilities that you use can't be touched by the banks. If you have a safe deposit vault where you have kept jewellery, the bank does not have the authority to break open the vault without your approval. Neither can the bank touch your money if your spouse or relative has defaulted on his payments, unless you are the guarantor or a co-borrower.

Your bank isn't suddenly going to land on you like a ton of bricks. Before taking such a drastic step, they follow procedure and mail warnings to the account holder. The procedure is that phone calls are made initially, then a notice is given and the bank follow up on it. If there is no response to any of these, the bank will deduct money from the savings account.

So, if you are facing a financial difficulty and are unable to repay the loan for a reason, don't escape but approach directly the bank to find a solution. Banks are willing to provide a moratorium of about six months, which they may extend it on a case-to-case basis. The banks are ready to listen if a person has an emergency such as health problems or an accident. 

The mistake that most customers make is that they talk to the call centre. You should write to the bank and start documenting all your communications and set up a time frame to resolve the issue.Once you do this, the problem will not grow to an unmanageable size.

Earn from Credit Card

Credit cards means different things to different people. To some, it is a easy way to spend. Just swipe the card and you can buy anything, anytime, anywhere. To others, it is convenience. You no longer have to carry cash. But the 28 sq cm of plastic in your wallet is also the key to a treasure trove. If you are smart user, you can use it to unlock the myriad benefits that come with a credit card. Of course, you need to watch out for the pitfalls that include high interest rates on rollovers, hidden fees and the dangers of falling into a debt trap. But if you are a disciplined borrower, a credit card can actually be a source of free money.

Interest rates are on the rise and borrowing is costlier. But your credit card can help you get an interest-free loan for up to 50 days. Credit cards have a one-month billing cycle and customers usually get 20 days to pay bill. If you pay the entire bill by the due date, no interest is charges on the credit. So, if you time your purchases correctly and buy at the beginning of the cycle, the charges will appear only in the next month's bill and you could get up to 50 days of interest-free credit, or free money.

This strategy works best if you have two or three credit cards, each with a different billing cycle. You can get your billing cycle changed to be able to optimize on this interest-free credit.

Do keep in mind that this is possible only if you settle your credit card bills in full by the due date. If you roll over the balance by paying the minimum 5% of the bill, you are charged 2-3% a month on the unpaid amount. Plus, you don't get interest-free credit on new purchases if the billing period starts with a balance.

The more the number of cards, the more careful you have to be about billing cycles and payment dates. If you slip even once during a year, there's a hefty late payment penalty as well as the interest charges on the balance which could wipe out the gains of several months of careful spending.

Dropping a cheque in the drop box on or before the due date is not enough. Credit card companies consider a payment only when the cheque gets credited. So drop it at least 2-3 days before the due date if you don't want to be slapped with late fees and other charges.