Tag: Loan

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.


Lost your job? Take these steps to avoid CIBIL score plummeting

A sudden loss of job is a very stressful event especially if one is the sole breadwinner of the family. All your financial plans and dreams suddenly grind to a halt. Uncertainty about the future and anxiety about how you will handle your expenses and pay off your debts bogs you down. In fact it can be quite overwhelming to think about the consequences of not meeting your financial commitments in time. Will unemployment affect your credit score? Let’s explore.

The fact that you are unemployed does not show up on your credit report. The credit bureaus do not factor in your employment status during the credit score calculation. Hence losing one’s job does not directly affect one’s credit score. But if you fall behind on your EMIs and credit card payments because of loss of income, it is sure to have a negative effect on your credit profile. Payments over 30 days late get reported to the bureaus and lower your score.

It all boils down to how you tackle the situation and deal with your debts during the period of unemployment. By being proactive you can ensure that your credit rating is protected even during this hardship. Here are a few important things that you should consider to deal with the situation.

Dip into your emergency fund- If you’ve saved enough money to cover for at least 6 months of your monthly expenses, then you need not worry too much. These funds are meant for such situations, as they help you stay on top of your payments while you search for a new job. But if the savings are not enough to cover your bills do not turn to credit cards, loans or cash advances to make ends meet. High interests on credit card balances and debt amounts will put additional strain on your finances and damage your credit score. Opening new loan accounts will reduce the average age of accounts and bring your score down.


Instead take the following steps. Not only will it help in avoiding the credit score plummeting but will help you improve CIBIL score.

Make a budget- The budget you made while you were employed won’t fit the current circumstances. Once you lose your primary source of income you need to cut down on unnecessary expenses. Eliminate all the spending that you can do without, and rework your budget. For example postponing holidays, cancelling subscriptions, cutting down on movies, dinner outings and salon visits will free up some extra cash and give you some breathing room while you figure out how to meet your debt payments. Factor in alternate sources of income like your spouse’s income, emergency funds, severance or part time income that you can rely on during this period.

Balance transfer- Consider transferring your credit card balance to a new card with an introductory offer of 0% APR. By paying no interest on your balance you can save a significant amount. Resist the urge to continue spending on credit cards. Start paying for your expenses by cash. This way you will be more disciplined in the way you spend.

Prioritize your debts- If you still fall short then you need to prioritize your debts. Figure out which debts are most important for you to service. Secured loans where you run the risk of losing your asset on non-payment should be the top priority. Unsecured loans, credit card bills can be lower priority debts. You can conserve your cash by making only the minimum payment on the credit card. Though rolling over balances will attract high interest charges sometimes you have to make tough choices to avoid defaults. Make sure you do not miss any payment and pay at least the minimum amount on time. If you delay or fall behind your payment, your credit score will be impacted.

Talk to your lenders- If you have a budget shortfall, defaulting on payments is not the only option. Remember, if your account goes into collections your credit score will take a serious hit. So it is always better to talk to your lenders and openly explain them about your financial difficulties. Express your desire to meet the obligations and ask them if they have any financial hardship programs. At times lenders agree to lower interest rates or set up more affordable repayment plans during the period of unemployment. You may even request for forbearance which will allow you to defer the payment schedule for a set period of time. Suspending payments will give you more room in your budget while you look for a new job.

Dealing with debt and maintaining your credit score is tough when you are out of job, but not impossible. Adjust your budget, talk to your lenders, use your emergency funds and resist the temptation of new debt. Careful planning and re-evaluation of goals will help you sail through this period.