Author: Credit Sudhaar

Difference between revolving credit and installment loans

The art of protecting your credit score is perhaps learned over the time. While it is a common knowledge that the credit repayment and credit utilization ratio are the two most important factors touching your credit report, it is rarely understood practically.

Mostly underrated is another calculation factor for credit scores is the type of credit drawn. It indeed affects the score the most and can have a far worse bearing on your credit score.

Very few of us realize that late payment of 2000000 home loan for 10 years would not hurt your credit score as much as the balance of 20000 on your credit card would do. Let’s understand why so?

In simple words the difference is basically due to the difference in the nature of loan. When you draw a loan such as a home loan, a car loan or any other purpose loan you raise credit on installments. These all are examples of installment loans.

While your credit card limit is in the form of revolving credit where in you have freedom to choose your loan and its repayment.

To understand the difference between the two let’s elaborate further on the difference between revolving credit and installment loans.

Basically there are two types of accounts that appear on your credit information report– Revolving credit and installment credit. Any type of loan or credit product would be using any of these repayment methods, none can use both.

Loans with fixed interest rate and duration such as personal loans, auto loans and home loans are type of Installment credit. They are repaid with pre-scheduled payments. They are drawn for a fixed amount at a fixed (or variable) interest rate and for a set period of time. As you repay the Installment loan over the credit duration, principal amount reduces and the loan closes with the full repayment. However the payment on revolving credit is not fixed, it is open-ended. You can repay and borrow as per your requirement up to the credit limit. One of the most commonly used revolving debt line is credit card.

Both forms of debt can be raised as secured and unsecured forms, but commonly installment loans are secured loans.

In the installment loans the duration of the loan is fixed however in revolving credit you never borrow a lump sum amount and thus there is no fixed payment plan or a fixed duration. You can pay in full, partly or roll back the balance according to your convenience.

The rate of interest on installment loans can be variable or fixed. Even in case of variable interest rate the amount paid as interest on installment rate falls under a market range and thus installment loans are never too costly. They are charged as per the market standards and are affordable. There are no surprise factors involved.

However the flexibility of revolving line of credit to repay often takes a toll on credit score.  This flexibility calls for higher rate of interest. In case of failure in repayment, rate of interest can rise even further. The creditor have all rights to increase the rate any time.

So, revolving credit can be said to be precarious for credit score as compared to installment loans. I hope this make you understand why carrying forward the balance on your credit card from one month to the other month drags down your score.

While the regular payment of loans and bills boosts your score by 35 per cent, the exhaustion of credit limit hurts your score by 30 per cent.

When your score tumbles down clearing off credit card balance is one of the fastest ways to improve the score. More so, many a times a professional credit counselor would advise you to draw installment loans to close the revolving credit in order to build your score. Generally personal loans are used to close high-rate revolving credit lines.

It is important to know here that by repaying your credit card balance regularly you can also build good history. It also make you eligible for increasing your limit. As the over usage hurts your score, keeping the credit usage below 30 % also helps your score grow. So you can use credit card limits to increase your credit worth.

How your credit management can impact your job!

It is known that your cibil score determines your eligibility for securing a loan or a financial product, but it is also important while securing a Job.

These days if you are trying to get employed there are various company norms in terms of background verification to secure a job that is address, Education, Employment, etc. majority of top corporates also are indulging themselves in finance background checks for any Cibil defaults or Loan defaults. This process helps companies to understand if the person is financially sound and also takes his payment integrity seriously


Reasons why Cibil Defaults Worries Employers

There are numbers of reasons why you have defaulted a loan and it would make it difficult for you to secure a job.

The very first thing what bothers an employer to hire a Loan default is the question, can the candidate make a good employee if he has been offered a mid-level or higher level Job which  demands a lot of integrity and dedication. A bad Cibil score is led due to loan defaults, payment issues which obviously mean the candidate was not serious about making the payments on time. If a Candidate is unable to cope up and manage their own incomes and loses, how is the person expected to be contributing to the growth of the company.

A loan default can lead to difficult life circumstances. For example, if you don’t pay your EMI’s on time that will lead to a bad Cibil score which leads to different penalties, that means you have to shell out more money than usual, which means you have to dig more in your pocket and cut on your other expenses which can lead to mental disturbance and depression which will automatically hamper your work and no employer would take the risk of hiring such employee.

If you have are going neck to neck with another candidate for a similar position in an interview, a great cibil rating as a tie breaker will help you secure the job over the other candidate.


Employers Invest in Permanence

Employers always want to hire employees who are evident that they are made for a long run. They want people who can manage themselves in terms of money; stature etc. now a person who cannot manage his Loan defaults will obviously make a bad employee and hence will be not given employment options.

How to Prevent Cibil Defaults

Check your Cibil report:

Check your Cibil report on a frequent basis, in particulars to your EMIs and credit card payments. Check to ensure there are no late payments incorrectly listed on your account and if you find one, do reports it with necessary proofs.

Manage Incomes:

Manage your incomes and gains so that you don’t default on paying your dues on time, this will ensure a good credit health; a good credit health means you can try getting a quick loan at unexpected hard times.

Say no to Credit Cards:

For some people credit cards are a matter of stature and spend unwillingly on the same, but when the time comes to pay the dues one understands the expenses were just not right. Maximum number of cibil defaults is because of excessive use of credit cards and not making the payments later.

Apply for what you need:

If you are applying for a loan, calculate first how much you need and then apply majority of the times people take loans just because they have opportunity to take one exceeding the actual amount needs. But when time comes to pay dues it becomes very much difficult to cope up with the EMIs.

Seek Professional Help:

If nothing is working out and you are out of ideas to prevent further damage on your cibil default, seek professional help. There are professional agencies who help you to overcome your loan defaults ad also help you secure a loan.


Can you Eliminate Bankruptcy from Credit Report?

Bankruptcy is something that no one wants to declare in their lives. However, the worst usually comes when you least expect it. So, if you unfortunately had to declare bankruptcy in the past it is natural to feel conscious about your credit report and CIBIL rating.  However, the good news is that you don’t have to worry.

It’s possible to improve CIBIL score even after having to deal with bankruptcy. In fact, it’s possible to get a personal loan for defaulters, so your situation is still better as it’s merely a result of bad fortune.

Let’s get back to the original question:

Is it possible to Eliminate Bankruptcy from Credit Report?

The answer is “no”. You can’t eliminate bankruptcy from your credit report. However, that’s not all.

While it’s true you can’t simply wipe off the instance of bankruptcy from your credit report, it doesn’t mean you have to suffer from its consequences. If you have regained a strong financial status and are using your credit smartly, then it’s possible to improve your CIBIL rating and enjoy options better than a personal loan for loan defaulters. Just take the following measures:

Apply for a Credit Card

Since you have just come out of bankruptcy, it’s likely that you CIBIL rating has taken a beating. So, what you need to do immediately is to start improving your score, and the best way to do that is to get a credit card.

Getting a credit card is easy, simple, and yet super-efficient. However, the problem is that in your case even that may prove to be troublesome. So, if you are unable to get a regular credit card, you can get a secured one instead. It’s a credit card that you get apply making a deposit as security. Usually, the security money is the same as your credit limit. So, if the credit limit on your credit card is Rs. 1 lakh, then you may need to deposit Rs. 1 lakh as security.

Monitor Credit Score

You can’t make progress unless you monitor it. So, be sure to check your CIBIL rating from time to time. This way, if you see your score dropping then you can find out the reason behind it and fix the problem.

By choosing to avoid score monitoring you may not be able to identify a major problem in advance and damage your credit score as a result.

Pay Your Bills on Time and Keep Utilization Low

There are two most important things to take care of when using a secured credit card for improving cibil score– paying your bills on time, and keeping your credit utilization ratio low.

Believe it or not, every single EMI payment or credit card bill payment matters in the calculation of your credit score. Thus, it’s important that you pay on time without fail. If you are unable to arrange the money for a particular instance then you can even borrow from someone if needed. It’s still better than missing the due date for the payment.

Your credit utilization must also be under control. So, if you tend to take out your credit card a lot when shopping, then maybe you should check the practice. Ideally, you should keep your credit utilization below 30% or 35%. So, it’s better to use your credit card when absolutely necessary, and for the rest of the time, you can use cash instead.

Don’t Close Old Accounts

It may make sense, in theory, to close your old accounts to limit the moving parts in your credit system. However, your old accounts are often the reason behind a large portion of your credit score. Thus, closing such accounts could damage it.

Whenever you have to close a bank account or a credit card account then do review the payment history associated with it and the duration itself. If the former is good, and the latter is long, then maybe it’s better to keep it open at least for a while.

If your credit score has reduced greatly after an experience with bankruptcy, you needn’t lose hope. It’s always possible to make progress no matter how bad your condition is. Just follow the tips given above and with time you will surely see an improvement. Good luck!