Tag: cibil score

Is Buying a House Good or Bad for Credit Score?

Having your own house is often a dream come true. However, do you know that it can affect your credit score too?

When you buy a house with a loan, then the way you manage the loan repayment and other types of credit during the tenure affects your credit report.

Home Loan Process and Credit Score

One of the biggest mistakes you can make when applying for a home loan is overlooking the importance of CIBIL score check.

There are two main reasons why you should always check your CIBIL score before applying for a loan:

  1. Credit Health

When you apply for a home loan, the banks send an inquiry for your credit report to assess your credit profile. However, this affects your score itself.

If you have applied for a loan at multiple banks at the same time, which many people do to increase their odds of loan approval, then it can have an adverse effect on your report. This is because this behavior is commonly dubbed as “credit hungry”. In other words, it suggests a sense of desperation and may lead to credit score damage.

By performing a CIBIL score check, however, you can see whether your report is in a good state or not. If it isn’t, you can work on it first and then apply for a loan. This way, you don’t have to apply for multiple loans. Since there will be fewer credit report enquires now, there won’t be any credit score damage.

  1. Better Interest Rate

Generally, a home loan has a long tenure which can be as much as 20 years. Thus, you would want to get the lowest home loan interest rate possible. Again, this is where checking your credit score can help.

If your score is low, then you can work on it so that when you do apply for a loan, you can negotiate with the lender for a better interest rate.

Credit Score During Home Loan Repayments

The way you repay your loan can also affect your CIBIL score. In that regard, the following are some of the things you should keep in mind:

Repayment Pattern

One of the most important things that you should be careful about during the loan tenure is the repayment schedule. It’s super important that you pay all your EMIs on time. This is because punctuality matters a lot when it comes to credit score calculation.

If you miss an EMI, then your bank informs their credit bureau about the same. They, in turn, mention this in your credit report under the tag DPD which stands for “Days Past Due”. So, if you pay an EMI 11 days past the due date, then in the accounts section of your credit report there shall be a remark like “DND: 11”.

Remarks like DND can have a big impact not just on your credit report but your score as well. Thus, make it a point to repay all the EMIs on time at all costs.

Credit Report Details

If you want to maintain your credit score, then be sure to conduct a CIBIL score check every once in a while. This is because as you will repay your loan, it’s possible that an error takes place in your report which affects the score.

For instance, your bank may accidentally inform the credit bureau that you missed a payment, or you may become a victim of identity fraud, etc. Thus, by checking your report every few months you can avoid these issues easily.

Improved Variety

While you have to be careful with a home loan, it can also improve your score easily and open more doors for a better home loan interest rate in the future. This is because when you take a home loan, it improves the credit variation in your credit report, assuming that it’s currently based on just a credit card repayment history or a personal loan repayment history, etc.  In fact, the more is the variety, the better is the score.

The bottom line is that home loan can be good or bad for you depending on how you manage it. If you are punctual with your EMIs and don’t accumulate a high debt, then it’s good for you. However, if you delay the payments frequently or simply default at one point, then it can have serious repercussions on your score.

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What to do when you cant repay your home loan?

As the real estate prices are soaring high, it is becoming difficult to buy a residential property by making a full down payment. A home loan is a blessing for a middle class Indian family as it helps them buy a dream abode without arranging for the entire amount upfront.  The loan tenure usually extends for a period of 15 to 20 years making EMIs affordable. But many unforeseen circumstances can make it difficult for a person to honour this long term commitment. A loss of a job, medical reasons, accidents, underestimation of future expenses are just a few reasons that can make it difficult to make the EMI payments on time. What if you miss some home loan EMIs? What impact will it have on your credit profile? How should you handle this situation? Read on to find all solutions.

Repercussions of not paying the EMIs

The first missed EMI doesn’t involve any serious action by the bank apart from a penalty charge that is added to the next EMI. The bank waits till the second monthly cycle to see if it is repeated default. If the second EMI is also missed, then the bank sends a reminder to the borrower to pay the amount. If the third consecutive EMI is also missed and the borrower doesn’t respond, the bank will send a legal notice to the borrower. It will mark the loan as an NPA and enforce “The Securitization and reconstruction of financial assets and Enforcement of Security Interest act’2002” ( SARFAESI)” to take possession of the property. In another 2 months the bank can initiate the foreclosure procedure wherein it auctions the house to recover the outstanding loaned amount. However no bank likes to get involved in this cumbersome process. The bank will always be open for negotiations and try to offer you a solution to settle things without a foreclosure. For this you need to approach the bank in a timely manner. You have a sufficient time of six months before your house is put on auction.

Impact on credit score

Payment history accounts for 30% of your credit score. Every month the missed payment information gets recorded on the CIBIL report and dinges your score by a few points. When you miss three consecutive EMIs, and the bank writes off the loan as an NPA, your name gets recorded in the loan’s defaulter list. This severely hampers your CIBIL score, and reduces your chances of getting approved for any kind of loan in future until you work to improve your credit score. If you do get approved, you will have to pay a high home loan interest rate on your borrowings.

Plan of Action

  1. In case you are unable to pay the EMI due to a sudden medical problem or a job loss, then the first thing is to approach the bank and explain your inability to meet the current EMIs. Take relevant documents to prove that the problem is temporary and you will get over it soon and service your home loan EMIs in the usual way. Also take proofs to show that you’ve always been diligent in meeting your obligations and your intentions are good. If the bank finds your reason valid and gets convinced that your situation will improve after a few months it will grant you a moratorium period of 3-6 months.
  2. If you have taken insurance, check whether it covers for loss of job or major illnesses. If such is the case the insurance company may take care of the EMIs for three months.

 

  1. If an increase in the rate of interest has increased your EMI amount or there is a strain on your finances due to some other reason, you can request for a restructuring of the loan. The tenure of the loan will be extended so that your EMI amount reduces.

 

  1. If you are facing regular cash flow problems, but have sufficient amounts in investments like FDs, equity, mutual funds, then you may think of liquidating your investments to service the EMIs and avoid the risk of losing your home.

 

  1. If you think there is no viable option left, but to dispose the property, you may discuss it out with the bank officials. Ask them if you can arrange the sale of the house yourself and use the sales proceeds to repay the whole amount. This will ensure that you get the best deal possible. It may leave you with some amount even after paying the bank’s liability.

 

Bottomline

Home loan is a long term liability and the EMIs take up a large chunk of one’s income. If it is not managed properly it can become a huge financial burden. It is always a good practice to have a contingency fund of 4-6 months of the EMI to tide over emergency situations. An insurance that covers for loss of job and illness is also a good way to prepare for crisis situation. If you are still not able to make repayments on time, follow the strategies above to avoid the risk of losing your home. Remember a dialogue with the bank will always help you find a feasible solution.

Are You Financially Healthy? 3 Ways to Check it

To add wings to your dreams you need to be financially robust. Being financially healthy is not limited to having a lot of hard cash in your bank account or having a recurring source of monthly income. Your financial health basically defines the overall dimension of your personal financial health. It includes solidarity of what you earn today, how much you save and your ability to draw loans for future.

As important it is to have a stable source of income in your life as is your readiness to face the unforeseen circumstances. From medical, to social, to personal, there could be several types of emergencies in life that can hinder your financial growth. To name a few, medical illness or a fractured leg bone, divorce, unemployment are a few occurrences that could hinder the pace of financial growth in your life.

No one plans for such unlikely or unhappy events in life. However by closing your eyes in the rain doesn’t save you from getting drenched. You should thus always take a good care of your financial health and stay ready for systematic financial aids such as personal loans for emergencies.

Let’s find out 3 clear ways of assessing your financial health:

  1. Credit Score
    A Credit score is basically a score of your financial report card. The better is your credit score, the better is your credit worth. Credit score by CIBIl which is the first major credit bureau of India, is measured between 300 to 900 points. The closer you are to 900 mark, the better is your score. According to CIBIL approximately 80 % of loans are processed to those who have score above 750 points.

    Your credit history primarily affects the score. Factors such as your past credit history of debt repayments, the length of your loans and credit cards, the mix of debts, use of credit limit and your recent loan queries basically affect the score. With a good credit score, lenders consider you as a credit worthy person and are keen to lend money.

    Certainly a person who is more likely to raise loan without a hassle is considered more financially healthy than the one who has a low CIBIL score and needs a guarantor for the same task. Your credit score thus plays a crucial role in reflecting your credit health.

  2. Debt to income ratio
    Another determinant of your credit health is your debt to income ratio. Ideally it is considered that you should not use more than 30 % of your income in repaying the EMIs and credit card bills. For, it is considered that approximately 50% of your income would be used on your basic and personal expenses. Ideally a person should also contribute towards the savings (including insurance) for retirement. However when you use more than 30 % on debts, it affects your savings and running expenses. This also indicates that owing to more financial obligations to meet every month your financial health is compromised. You are not able to save for your future and an unforeseen event may disrupt your financial health.
  3. Credit cards
    In this age of plastic money, one of the key indicators of a person’s financial health is the way s/he uses cards. The high balance on credit cards is indicator of high credit appetite. And when you are unable to repay the balance and roll it over to next month, it not only attracts a late payment charge it also indicates shortage of paying for your financial obligations. This hurts your credit score and reflects bad credit health.

    The best way to keep a check on credit card balance is to use a debit card instead. Every use of a debit card would remind you of the expenses being incurred and help keep a check on how much you are spending. Likewise, those who own too many credit cards and keep balance on each card are considered financially weak people.All in all, how you use your funds today directly affects your credit worth. Right from your monthly income, to your savings, to insurance plan, loans and credit cards all define the state of your financial health. Simply by pulling out your free credit report you can have a direct access to your financial activities and analyze how you are performing today for a healthy tomorrow.