5 Practical Steps to Get You Out of Debt

You are aware how debt limits your opportunities and disturbs your financial life. Also, if you are asking yourself “does debt hurt my credit score?” then yes, it brings it down too. Your debt could be a result of various actions. It could be that you had not anticipated certain medical emergencies, educational expenses or any other unavoidable expense or it could be a result of your relentless spending. Whatever the reason, you have now realized that you want to get out of the debt zone. Here are some practical tips that could get you out of debt:

Create A Plan and Stick to It

Get a piece of paper or open a Google Spreadsheet on your computer. Write down all the amount you owe and plan to clear out all the debt in the next 6 months or any other realistic duration. Chalking out a good plan and religiously following it gives you the determination to come out of your debt. A good debt payment plan involves identifying the areas where you spend your money regularly. You can start by maintaining a spending journal. Many times, we neglect the seemingly minor expenses which mount up to become a decent amount.

At the end of the month, you can manage your money by identifying and eliminating unnecessary expenses. You can try to cut off on some expenses which you can live without such as your YouTube premium or Netflix membership, eating out, clothes, etc. These expenses, although small, may accumulate to become a great saving once you start noting them.

Lower Your Debt to Income Ratio

Your debt-to-income ratio is all your monthly debt payments divided by your total monthly income. This is one of the ways how lenders measure your ability to manage the payments you make every month to repay the money you have borrowed. For example, if you pay a house loan EMI of Rs. 35,000/-; Your Car EMI of Rs. 10,000; and another Rs. 2000 for the rest of your debts with a monthly income of Rs. 90,000/-, then your debt to income ratio will be ((35000+10000+2000)/90000) *100 = 53%. This indicates an unhealthy debt to income ratio.

The ideal debt to income ratio should be 30% or less. Don’t worry if you are not there yet for it is understandable that conditions will not always be perfect. But you can always try to slowly and steadily push yourself below the 30% mark by avoiding further unnecessary debt. While you are at it, keep a track of the developments in your credit score. You can check your free credit score on CRIF High Mark.

Focus On Clearing One Debt at A Time

There are two approaches to go about clearing off your debt, one at a time. The first way, known as the debt snowball, is to make a list and pay off your debts amounting in the ascending order, i.e. from smallest to largest, regardless of the interest rate. The point is to tackle the smallest account at a time and eventually snowballing into larger ones. While this method might accelerate your debt clearance and may give you the confidence to tackle the larger debts as you go down the list, it is not a mathematically sensible method as we aren’t considering the interest rates here. This is where comes the more logical technique called the debt avalanche or laddering.

In laddering, you arrange your debts in the descending order of their interest rates. The one with the highest interest rate becomes your priority. Here you make the minimum payment for every account except the one that you are trying to get rid of first. For this debt, you try to pay the maximum possible amount to clear it off as early as possible. Once that debt is paid completely, move on to the card with the second highest rate and so on. By doing so, you clear off the debt with the highest interest rate and will save the most money. Remember to NOT close the account once the balance is paid off as that will damage your credit. Just let the account sit at zero balance.

Stop (Ab)Using Your Credit Card

One of the easiest ways you can come out of debt is by avoiding going further into debt. One of the factors which keeps you clinging to debt is the use of your credit card. Using a credit card rampantly only serves to add more debt on you. So stop using your credit card, at least for a while, until you get yourself out of debt. This would also add discipline to your life when you stop spending on everything your card can buy. Moreover, your credit score would also benefit hugely as this would bring down your credit utilization ratio.

Sell Your Unused Items

Just a look around your house and you will find that there are a lot of unused items which you are better off without. It could be the pile of newspapers and books, your old printer or DVD player, or even an extra motorcycle, depends on what you need the least right now. In this way, you can also earn some extra cash!

If you follow the above steps diligently, coming out of debt will transform from a distant dream to a cake walk!

Credit Utilization Ratio: How it Works & How to Improve It?

The Credit utilization ratio is one of the key ingredients in determining your credit score, so it’s crucial to understand how it works. After all, a good credit score can qualify you for higher loan amounts and lower interest rates, while a low credit score can make it difficult to reach your financial aspirations. In this blog, we’ll try to cover everything you need to know about credit utilization, including:

• What is the credit utilization ratio?
• How is the credit utilization ratio calculated?
• What is a good credit utilization ratio?
• How to improve the credit utilization ratio

Let’s Begin With What is Credit Utilization Ratio?

Your credit utilization rate, sometimes called your credit utilization ratio, is the ratio of your credit card outstanding to your credit limit. They can impact up to 20-30% of a credit score, depending on the scoring model being used. If you never use your credit cards and there’s no balance on them, your credit utilization would be zero. If you typically carry a balance on one or more cards, you are ‘utilizing’ some of your available credit—lenders and credit bureaus will take note. While a one-off higher utilization rate for your credit cards may not really impact your credit score, your credit score will certainly be impacted adversely if the credit utilization rate continues to be higher on a regular basis.

How is the Credit Utilization Ratio Calculated?

Credit utilization ratios can be calculated for each credit card (card balance divided by card limit) and on an overall basis (total balance on all cards divided by the sum of credit limits). For instance:

 BalanceLimitCredit Utilization Ratio
Card 1₹0₹5,0000%
Card 2₹8,000₹10,00080%
Card 3₹1,000₹7,00014%

Total Credit Card Balance / Total Available Credit    =   Credit Utilization Ratio

Total credit utilization ratio in this case will be 40%.

What is a Good Credit Utilization Ratio?

The general rule of thumb with credit utilization is to stay between 30-40 percent. This applies to each individual card and your total credit utilization ratio. Anything higher than the above-mentioned percent can cause a dip in your credit score as lender relate this to a credit hungry behaviour. This doesn’t mean that one cannot ever cross 40% of the credit utilization on any card. The impact on credit score is more only if high utilization seems to be a common pattern over last 6-12 months.

Finally, improve your credit utilization rates and eventually your credit score through these smart moves:

1. Paying credit cards on a more frequent basis – While you may be using your credit cards for availing the card benefits on different transactions, try to reduce your credit card outstanding by more than minimum each month and paying more frequently. For example, even while the credit card statement is generated on a monthly basis, you may keep paying your credit card outstanding every 10 days. As such, your credit limit will keep getting replenished and thus, your credit utilization rates will be visible as low.

2. Availing a Higher Credit Limit – Just in case you believe that you can effectively toggle between credit card dues and your regular payments, you can ask for a higher credit limit from your bank. Given the current credit card usage remains to be the same, the credit utilization rate will automatically reduce as the usable limit has increased. However, in such times, you should be careful that having a higher credit limit may also tempt you to spend more.

3. Using Multiple Credit Cards for Managing the Limits effectively – In case you are holding multiple credit cards, try to use different cards for different transactions instead of using a primary credit card for all the transactions. Accordingly, you will have a lower credit utilization rate across all the credit cards, instead of having a very high utilization rate for one card and very low/ nil utilization for the other cards.

4. Leave cards open after paying them off- By paying off the card, you’re reducing your total balance. By keeping the card open, you’re maintaining your total credit limit—thereby lowering your credit utilization ratio.

You should keep monitoring your credit score on a regular basis and strive to maintain a good credit score with the help of better credit habits. To check your score from CRIF, click here

What Is a No Cost EMI and Does It Work In Your Benefit?

With e-commerce websites running fantastic discounts 24x7x365, shopping has ceased to remain a ‘festive activity’ and has instead been replaced by a year-long affair. Buying behavior has inclined towards becoming more impulsive than ever with the continuous bombardment of notifications tempting customers to buy at the best discounted price. Although on the surface it seems like you have saved a goodly amount with a lucrative deal, in reality, you end up buying stuff which was not even required in the first place.

One such scheme that has gained popularity in the recent past, especially in the white goods sector, is the no-cost EMI or zero cost EMI scheme. It is not uncommon to hear someone happily buying a mobile phone or a television or an electronic appliance which they initially thought impossible, using the zero cost EMI offer. But is this really a great deal or a smart trick? Let’s find out!

What is a No Cost EMI?

What is the first thing that strikes your mind when you hear the phrase, No Cost EMI? No interest payments involved. Isn’t it? You feel it’s a no interest loan. But it’s not. No Cost EMI is a loan involving interest payments. On availing No Cost EMIs, your bank enjoys a discount in the form of interest. The Reserve Bank of India (RBI) in its circular in 2013, has said that the concept of zero percent interest is not valid. This means the banks are clearly not entitled to provide loans at a zero percent interest. Then how are the retailers running this offer?

How Does This No Cost EMI Scheme Work?

There are two ways in which these schemes operate. One of the common ways is to forego the discount and instead pay this amount to the bank or financial institution to cover the interest cost. Another one is by adding the interest amount to the price of the product. Let’s look at these schemes in a bit detail:

a) When discounts equal interest: The most common way through which retailers offer ‘No-cost EMI’ is by offering discounts equivalent to the total amount of interest to be paid. Suppose you want to buy a phone that costs Rs 30,000/-. Under the 3-month EMI plan, at an interest rate of 15%, you would have to pay an interest amount of Rs 4,500. But in Zero Cost EMI, you are exempted of discount and you pay the original price of the Smartphone in EMIs. What does this mean? But if you make an upfront payment, the Smartphone would cost just Rs 25,500. You get it at a discounted price of Rs 25,500. If you opt for the No Cost EMI, you end up paying Rs 30,000. You don’t get the Rs 4,500 discount which goes to pay interest on the loan. The total price you pay on the Smartphone is split into money paid to a retailer and interest paid to a financier.

b) When the interest amount is added to the product price: Another way in which such schemes work is by adding the interest amount to the price of the product. Let us say the product costs Rs 15,000. The retailer lures you to buy this product under the ‘No-cost EMI’ plan for Rs 17, 250. Here the interest of Rs 2,250 is already added to the cost of your product and will be paid by you in installments. Therefore, if you have taken a three-month EMI plan, then the amount payable by you will be Rs 5,750 per month. Sometimes the Rs 2,250 may be covered as the processing fees.

Should you opt for No Cost EMI? You can opt for No Cost EMI if:

• You want to buy an expensive or popular product which now is beyond your budget.
• You don’t want to spend in one go or do not have enough cash to make an upfront payment.
• You are getting a good deal by availing an additional discount.
• You want to start building your credit history and credit score by availing a short quick consumer durable loan.

When you opt for a loan on No Cost EMI option you should also be careful about the down payment and processing fees, if any. Read the fine print and terms and conditions carefully. The retailers don’t offer this scheme on every product that they sell. Also, if you do not have a credit card of the relevant bank that offers the scheme, you can’t get the No Cost EMI deal if it is attached to the credit card. The credit limit on your card gets blocked too for the entire transaction value even though you are liable to pay just the EMIs. There are other financiers who give such offers to consumers with no credit cards or even with no credit scores. Such financiers have people in store to support you with the processing of loan within 5-10 minutes. The offer may sound lucrative but if not used carefully it can affect your financial budgets and ultimately your credit scores!

Be Wise, Be Happy!

What To Do When Interest Rate Goes Up?

As interest rates continue to rise, especially in the past few quarters, opting for a loan has become more and more difficult. According to financial services industry trends, the interest rate is only expected to rise further. In such times, the borrower needs to tighten their wallets and find out ways to reduce the impact. There are ways in which you can save a significant amount of money if only you be a little bit more vigil, well informed and proactive.

What Can You Do For Home Loans?

There could be tough times ahead for home buyers since that is usually the largest loan one has. Many banks today are charging from 8.5% to 10% which is a far cry from a few years back when interest rates were as low as 6%. With such rates, your monthly EMIs won’t be affected but your total payable interest will certainly go up and the tenure of your loan. Following are just some of the key ways in which you can tackle this situation and save more than a few bucks!

1. Increase your EMI instead of tenure
Most of the lenders will extend the loan tenure instead of increasing the EMI itself. A smart borrower should increase the EMI and look out for a tenure deduction to save from paying more than what they had planned for.
For instance, let us take a look at the example below to have a more clear understanding

As you can see, when there is a hike in interest rate and the tenure increases, you end up paying ₹84,978/- more than your actual payable. However, if you only increase the EMI amount by a meagre ₹120/- you must pay only ₹21,294, which is much lesser than the amount you had to pay in case your tenure was increased. This is just an example and you can save depending on your requirement.

2. Pay off a goodly chunk
If you are able to, pay off the loan as much as possible to reduce your tenure. In this way, you will be saving a lot of excess money which would’ve been spent and will also relieve the mental burden. In the above example, you can pre-pay Rs 15000 and keep the EMI and tenure same, neutralizing the impact of interest rate hike. You may know that pre-payment on home loans do not elicit any charges.

3. Review how your interest rate is pegged
Over the years, RBI has issued guidelines to banks and housing finance companies to keep changing the pegging for home loan interest rates. You would have heard terms like PLR, Bank Rate and MCLR. MCLR is the latest reference for lending rate by banks, and it allows better benefits for consumers. Do ensure your home loan interest rate is now pegged to MCLR and not to Bank rate, if you have taken loan from a bank.

4. Switch your lender
As a final option you can also consider switching your lender. While changing lender could result in saving on total payable interest, you should also take into consideration other expenses such as processing charges and documentation fees. If you are saving more in Interest after the payment of a few thousands as processing fees, then that would be a good deal. However, if you are closer to the completion of your loan, it would not make much sense to peep into other schemes. While you’re at it, make sure that your credit score is not hampered or affected due to multiple inquiries.

Tips to Avoid splurging On Your Diwali Bonus Today For A Better Tomorrow

Besides lighting diyas, exchanging gifts with your family and friends and making a handful of joyous moments, Diwali also brings cheer in the form of bonuses from work. You often make a never-ending shopping list as you have that hefty Diwali bonus to bolster your spending intentions. While it’s okay to splurge a little from it, this money should be wisely used to help you reach your long-term financial objectives. We often forget that the habit of saving and investing smartly lead to wealth creation rather than indulging in extravagance. For those who lack a clear plan on what to do with the bonus money, here are some tips that will help you spend wisely and make the most of your Diwali Bonus:

Prepare a Diwali Shopping List

Diwali is a festival where people tend to overspend or do most of their major shopping because at this time of the year all the exorbitantly priced things are sold at discounted rates. However, before you spend your hard-earned money mindlessly, consider preparing a Diwali shopping list. Every item, that you’re likely to buy for Diwali should be included in your list. Once the list is ready, scrape out the things that you can skip buying and make do with your existing things. Identify the items that you really require in that month and eliminate the ones that seem unimportant. A well-prepared shopping list will help you save money from the bonus and prevent you from being an impulsive shopper.

Pay Off High-interest Debt

Double-digit interest on a loan can be harsh on your financial stability, especially if you have been trying to clear it for a long time. You should use your bonus at this time to repay any high-interest debts before shopping for frills. Financial experts say that an individual’s priority must be to do away with the debt that has an interest rate more significant than what you could earn on that money elsewhere. Paying off debt can ensure peace of mind and help you clear your finances for other expenses.

Create an Emergency Fund

It’s a good idea to have an emergency fund that can meet 3-6 months of living expenses. This can ensure a stress-free lifestyle if you were to face an unexpected and costly medical issue, or unable to work for any reason. An emergency fund offers much-needed liquidity in the event of an unanticipated expense. With an emergency fund at hand, you may not have to apply for a high-interest loan to handle a crisis.

Keep an Eye for Festive Loan Offers

On Diwali, people welcome wealth and prosperity into their homes. Therefore, buying gold and other expensive items such as a new house or a car during this festive season is considered to be auspicious. If you’re planning to buy a car or a house, this is the great season to do so as a lot of banks offer great deals on various types of loans such as car loans and home loans. Invest your bonus money in a planned way to get the most out of it.

Avoid Hasty Decisions That Harm Your Credit Score

Mindless decisions that affect your credit score and reports should be avoided instead you should always take decisions that will improve your credit score further. Random purchases or loans that are difficult to repay later would refrain you from achieving stability in your finances. Make sure you plan and chalk out the ‘can’ and ‘cannot’ to stay informed and aware.

Keep a Check on Your Credit Purchases

When you purchase on credit it is essential to constantly calculate and set all due dates as a reminder. It is essential to keep your credit card purchases under control as exceeding limits could affect your credit score and credit report directly. Also, to maintain a healthy credit score one must repay the credit card dues on time because any delay would hamper it.

Diwali bonus and the festive discounts will make every deal look very alluring but refrain yourself from buying unnecessary things and pre-plan your expenses during the festivities. Be a smart consumer and get the maximum benefits from the dealers.