A bank or any other lender evaluates a potential borrower before granting a loan and handing out the money. This evaluation can be called credit risk assessment as the bank is trying to understand the risk of potential default by the borrower on this line of credit. The Five Cs of credit is a widely popular framework which considers five characteristics of the borrower to helps lenders gauge the creditworthiness of the borrowers.The 5 Cs of credit are Character, Collateral, Conditions Capacity, and Capital in no particular order. Let us understand what these 5 Cs stand for.
A line of credit is when a financial institution, usually a bank, sets a borrowing limit which can be used at any time by the individual. So, you are free to pull out money at any time as long as it is within the set limit and repay as you can. You can borrow from this chunk again as and when required.
The amount of interest to be paid, the size and number of installments are all set by the lender. While some lines of credit allow you to write checks, others give you some sort of a credit or debit card. These can either be secured or unsecured in nature wherein the unsecured ones are more susceptible to higher interest rates.
The innate quality of these lines of credit is the flexibility. You can apply to get a certain amount but you have to pay only the amount that you use and the interest rate applicable to that amount. In addition, borrowers can adjust the repayment amount depending on the funds they have in hand. So, you can choose to repay all the amount in one go or pay in installments.
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Secured Line of Credit
A secured line of credit has a collateral which secures the loan which means that it can be seized by the lending institution if the loan is not paid within the specified time frame. Another option is to sell the collateral with which the bank can recover the loss incurred. Since these lines of credit are a secure offering for the banks, the interest rates charged and other processing fees are affordable.
Most of the loan types are secured like a home loan holds the home itself as a collateral and the same applies to a car loan as well. In case the borrower fails to make timely repayments, then the bank has the right to evict the borrower and seize the house.
The benefits of opting for a secured line of credit are:
- You can secure a higher line of credit
- Affordable interest rates
- People with an average credit score can also secure these loans
To go for these lines of credit, the borrower must ensure that they have valuable assets that can be used as a collateral.
Unsecured Line of Credit
These loans expose lenders to a higher level of risk since there is no collateral that is required for these loans. In case the borrower stops repaying the loan, lenders can only opt for a legal course of action to sue the borrower or report the failed payments to the credit bureaus and bring down the credit score. Interest rates for these are higher than secured lines of credit and the amount that can be borrowed is lower due to that.
The key benefits of opting for these lines of credit are:
- You have a lower risk exposure as the lender cannot seize anything from you
- There is no collateral required
- These lines of credit are open ended or without an end date
Personal loans, credit cards and student loans are a few examples of unsecured loans.
Difference between them
The first and most evident difference between secured and unsecured lines of credit is the collateral. You would need to place a collateral in case of a secured loan but in case of an unsecured loan, you would not need any collateral.
Due to the above difference, the interest rates also differ greatly in the two. Since the lender is at a higher risk while giving unsecured loans, their rates of interest are higher. Since the risk is higher in unsecured loans, they are harder to obtain without a good credit score. So, make sure you have a strong credit score in order to pick up a personal loan, credit card or student loan.
If you’ve spotted an error on your credit report, you should take immediate steps to correct the inaccuracy. An error on your credit report could lead to lower credit score and impact your ability to open a new credit account or get a loan. Here are steps you can take to ask the credit bureaus to remove incorrect black marks from your credit.
Student loans are installment loans which means that you pay a certain amount over a fixed period of time. It affects your credit history like an installment loan; pay your loan EMIs consistently and your credit score keeps building, miss a payment and end up with a low score. However, student loans come with the liberty of a few extra months to complete the payment before you are reported late.
So, when you make timely payments, your lender sends the details to bureaus which establish your track record. You can take a look at these details on your CRIF Personal Credit Report once a year for free! Keep in mind that the student loan affects the credit score of the one who takes it up. If your parents take up the loan, their credit score will get affected every time the loan EMI is paid in time and every time it is not. A good score, however, will always be a plus point.
Related Reads: Educating Myself for My Education Loan
What happens if you pay late?
Sometimes you may get delayed on the loan EMI payments due to a financial crunch or it could’ve simply skipped your mind. These are the usual slippages which the banks also take into consideration. But your score won’t get affected till your bank reports your late payment to the bureaus.
Some student loans extend a levy of 90 days while some report it within 30 days of missing a payment. Once this is reported, the entry remains on your credit report for 7 years. Despite not affecting your credit score right away, you missing a payment can be slightly expensive as banks start charging late fee as soon as you miss a payment.
Cannot pay the student loan? What do you do now?
It often happens that money falls short due to sudden expenses and in such cases, there are a few ways to reduce your monthly loan EMI amount or pause it till you sort things out. You can either sign-up for an income driven repayment plan which would basically set monthly payments of 10% to 20% of your monthly income. It can also be changed annually.
Another way to go about this issue is to apply for a modified payment plan which offers you flexible repayment options or you can decide to defer your loan which would pause your monthly payments. If you change your loan repayments in time then your credit score won’t get hurt. Just ensure that you pay the agreed-upon loan EMI each month.
How will refinancing affect my credit score?
Interest rates and repayment policies undergo changes whenever needed, in such a scenario, you can choose to refinance your loan. This means that you pick up another loan with policies and terms suitable to your needs with which you clear off the previous loan and move on to repay the new loan EMIs.
Every loan-related inquiry made on your credit score is a hard inquiry. This means that every time a bank runs this enquiry on your report, you lose a few points on your credit score. To avoid this, you can make sure that you apply for all the loans you are considering within a period of 14 to 45 days. All these will count as a single inquiry having only a single impact on your credit score.
Planning to pick up a student loan is a big step in anyone’s life, be it a parent or the students themselves. Ensure that you have emergency funds in place to repay it and have the right knowledge to take action.
Your credit score isn’t just a number on paper. It’s a door to opportunity, from jobs to credit cards to loans. And, the higher your score, the wider that door opens. Your credit score calculation is based on several factors in your credit report: length of credit history, amounts owed, new credit, credit mix, and payment history. Banks use versions of these scores to make lending decisions. That means that the advantages of good credit factor in to almost every aspect of your life, whether you’re hoping to purchase your first car or get approved for a loan to start your small business. Here’s how a high credit score positively impacts your life:
Every 1st of January, when the clock strikes 12 at midnight, what is the first thing you think about? Most would say wishing everyone a happy new year. Of course! But what’s the second or third thought? Planning how you want to lead the new year and set goals. While some might be fairly ambitious, some can be realistic too!
Everyone has to take stock of their actions, decisions and plans made in the previous year to understand what worked and what needs to be changed. These could range right from personal goals like planning an international trip to professional goals such as receiving a promotion by year-end. But the plan that all these goals derive is how strong a financial plan you built in the last year.
Related Read: How I Raised My Credit Score by 250 Points
Financial plans are dynamic and they need to adapt to the new situations and requirements that you shall lay. Here are a few goals you can place across 2020 which is not only a new year but also a new decade!
Goal #1: Catch up with your credit history
Your credit history will tell you how high above or deep into the water you are. It enlists all your financial transactions and also exhibits the factors that raised or reduced your credit score in the last year. In addition to that, check your personal details and KYC information in case there has been a change in the previous year. Wrong information can also hamper your credit score and we don’t want that to be the case!
Goal #2: Take stock of last year’s credit lines, transactions etc.
While you are looking at your credit report, evaluate the lines of credit you picked up and how you did in repaying them. The mix of credit lines you pick is an important factor accounting for your credit score. So make sure you branch out with the kind of loans you pick to ensure that you have used the right type of loans when needed. If there were any defaults or late payments, they would’ve affected your credit score. So, make a promise to stay at the top of your repayment game in 2020.
Goal #3: Pay all your bills on time and lay a plan to reduce your credit debt
If you have faulty credit card due clearances or late loan EMI payments, list the reasons behind them both, real and hypothetical. Evaluate how you should avoid the real reasons from recurring and be prepared to deal with the hypothetical ones in advance. Every faulty payment reflects on your credit report for 7 years, so make sure you don’t get late in paying your credit card dues and loan EMIs this year.
Also, start planning on how to reduce the number of credit lines you pick in a year. The last thing you want is to display a credit hungry behaviour! So, make a list and take stock of those credit lines which you could’ve avoided. Try to abide by this in 2020!
Goal #4: Apply for credit only when absolutely needed & stick to a monthly spending limit
You may have received a credit card with handsome credit limits but that doesn’t mean that you can use all of it, especially when you cannot afford to repay the entire due on time. Keep a few points in mind when you get a new credit card! Plan your savings and put a cap on your monthly expenses. This will help you plan ahead and save up for any emergency expenses. Avoid picking up credit to repay another line of credit, pick it up only when absolutely necessary.
Goal #5: Save up on emergency funds
Emergency funds are underrated. It may seem like an extra amount getting blocked from your monthly income amidst all the dues and EMIs, but having an emergency fund is very important for everyone. Right from health needs to emergency travels, you should be prepared for everything in advance. So, invest in an emergency fund and build it judiciously.
These 5 goals will help you ace your finances in 2020, so make sure you keep a stellar credit history and take measures to maintain it every year.
Want to lay down such goals? Begin by checking your CRIF Credit Score now.
Rohan is browsing through his mail. He sees the monthly credit card bill sitting in his inbox, oh-so-proudly. It was his birthday month and his bank gave him a new credit card with a generous limit. And this leads to the crux of the matter: he crossed the planned budget! Now, he is contemplating if he should pay a partial amount this month and the rest next month or leave all of it for the end of the month, when he receives his salary.
He thought to himself, “What if I miss just one odd credit card payment? I am sure the bank will not mind!” Haven’t you too had this thought at some point in time? The honest answer is, they won’t mind you missing a payment… but they’ll add an interest to it. “But what about my credit score?” Rohan thought. As far as that is concerned, yes it will be affected.
Sometimes, missing a credit card payment might not be intentional; it could be because of a billing mistake or because of a financial crisis. But a lender does not look at it in favour of your credit history. It only shows that you, at some point in time, have faulted on clearing your credit card dues. A missed payment doesn’t only affect if it is your credit card, it can also affect your score on add-ons cards, where you take accountability of someone else’s expenses too.
Related Reads: 5 Things You Should Do When You Get A New Credit Card
How does a single missed payment affect your credit score?When you miss paying your credit card dues on time, the interest added on it is compounded daily. So you can end up paying an interest of 3-4% per month depending on your credit card limit. The same applies to your outstanding amount when you pay the minimum amount. In short, if you do not clear your monthly credit card dues on time, you will see your amount blow up significantly and can increase your repayment period as well!
In such cases, lenders see you as an unfit borrower- someone who is more likely to default on timely payments.
Need a simple solution? Financial discipline!Your score is calculated taking into account the last 24 months of your credit history. So that is how long it will take for you to mend your credit score for good if you end up missing on your timelines. Even so, these transactions will be visible on your credit history for 36 months.
In order to mend or rebuild your credit score, you will have to hold your end of financial well-being with absolute dedication. Ensure that you do not let a single instant arise that can have an impact on your credit score.
Ways to rebuild your scoreTo get back on track and raise your credit score, you have to be vigilant about the following things:
- Make it a point to repay your debts and dues fully in time. A part payment indicates that you have difficulties in repaying but no problem in borrowing. So, do not let your outstanding debt snowball.
- Consider taking a personal loan to repay your outstanding credit card dues. This way you will get rid of a compounding interest and end up clearing just one part of debt, your personal loan.
- Avoid making any transactions on your credit card till your dues are cleared. This will appear to be difficult but it is for your financial well-being.
- Keep a close check on your CRIF Personal Credit Report to follow-up on the developments and take stock of your next steps.
Having the freedom to spend more than your current affordability is very tempting till it becomes a huge snowball of debt. Avoid reaching that point with your credit cards and ensure that you pay your credit card dues on time. Missing even a single payment can affect your credit history badly.
Take stock of your financial history by pulling your CRIF Personal Credit Report and start making wise choices right now!
Banks check your CRIF Credit Score before approving your loan, so work towards a higher credit score with good credit habits. The higher the score the better are your chances of loan approval.
A good credit score can significantly improve your chances of obtaining a big-money loan to acquire the home you always wanted. Credit score is values that are ascertained after analyzing an individual’s credit files and are used to determine whether a person is creditworthy or not. Banks are quick to deny loans if credit scores do not meet their prescribed limits. Therefore, it is imperative that this credit score is improved before applying for a home loan.
Isn’t festive season the best time to cash on impulse? Consumers are already spending heavily either shopping, taking a holiday or planning a lifestyle upgrade. That’s why discounted loan advertisements become pretty hard to avoid! Before you opt for the festive schemes, offers and loan discounts, just keep your credit score and this quick read to in mind!
What’s in it for me?
Festive loans give you special waivers in the processing fees or lower interest rates for the loan tenure. Banks tie-up with several merchant segments like travel, lifestyle, automobile, real-estate, etc. to get you quick disbursement on loans for travel & holiday packages, home appliances, fashion, electronics, and accessories! Banks are thrilled to offer personal loans or credit cards within a day since they are unsecured, i.e. do not require collateral, which makes them easy to offer!
How does it work?
Loans are for a genuine requirement and a liability that needs to be paid back. The festive offers do make a lucrative bet, but make sure you read the underlying terms and conditions before riding on the debt wagon.
Related Read: What is a no-cost EMI and does it work in your benefit?
Need to Know!
Recently, RBI has clarified that the term “Zero interest” or “No-cost EMI” does not exist as banks or lenders only earn from the interest rates. So, they either charge you a lump sum when you are availing the loan, or give you a higher monthly EMI, perhaps charge you a higher processing fee. You will find kiosks outside banks offering ‘quick loans’, requesting you to fill up the application forms.
When you apply for a loan, the lender has the authority to pull out your credit report to check your loan eligibility. This is called a ‘hard inquiry’ and can knock off a few points of your score. If you do have to borrow this festival, make sure you don’t apply for several festive loans at once, anticipating which one will go through!
Good to Know!
Millennials today survive on debt, quite literally! Either with an ongoing car loan or a home loan, or at least a credit card. Paying in EMI’s instead of a chunk out of your corpus seems easier to sustain your lifestyle needs, but it’s important to know that you only own things when you pay them off completely. In the festive mood, loan discounts may seem like a savior in need, especially with living costs going through the roof. Ensure you do thorough research on the lender options and the type of loans you can apply for before you make a hurried application.
What should I do?
It is not uncommon to make big purchases during the festive season but it is essential that you know how much you need.
Analyze your personal financial goals and the benefits it actually gives you instead of making low prices the sole reason to apply for it. Do you really need a car upgrade? Is a foreign journey on your to-do list? Have you been waiting to buy a home? Having a credit mix of loans, credit cards and other credit lines can boost your credit score and thus your creditworthiness but only if you make timely repayments on them. Hence, planning your finances for the credit repayment tenure is the first step towards managing debt well.
Take a quick informative tour online and prepare the documents you require for the loan application like income statements, tax receipts, and identity proofs. Check how much income you are left with after you pay your credit card dues, household expenses and taxes to estimate loan EMIs beforehand, making it easier to pay off without hurting your monthly budget!
Once you are ready with your research on lenders and loan types, give your credit score a quick check to confirm loan eligibility that’ll help you avail it effortlessly. A credit score is an important tool that lets lenders study your credit history through an automated report that determines your creditworthiness. If you are worried about a low score, here are ways to repair it before you apply.