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Bad Credit

Of high & low credit scores

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Some time back, a student shared an interesting situation with me. He had approached his nearby bank for a student loan. His loan application was rejected by the bank despite sufficient income of his parents. “The credit score of your parents is bad. We cannot lend you the money,” reads the bank communication. The parents were surprised to learn about credit score, as they were not aware about this kind of score. While seeking exact meaning of credit score from the bank official who had done appraisal of the study loan application, they were astonished to learn about their poor repayment of their earlier loans taken a few years back at some other bank. 

It is worth mentioning here that banks check the credit scores of parents whenever they receive a study loan request. The reason for taking credit scores of parents into account while processing an education loan application is that students will not have any such credit history and as such the parents for being the co-borrowers (as per education loan scheme it’s mandatory for parents to be co-borrowers) of the loan are to be assessed under the credit score system.

Before deliberating upon all about credit scores, let’s have a look at the present scenario when COVID-19 pandemic has emerged as an unprecedented global crisis yet to be controlled.  The pandemic  has not been less than a tsunami for worldwide economy and no geography is immune. As we have been debating about the new norms continually rolled out by the crisis in previous columns, the social, financial and economic impact of this crisis is going to be far reaching. The financial system and the regulations governing it  will be hit by never-seen-before changes, especially in the retail credit market. Consequently, banks will be forced to respond to the changing scenario by redesigning their customer management frameworks. They would be realigning their loaning strategies in line with the COVID-induced new set of risks. Precisely, the banks would be observing extraordinary caution while lending to different sectors of economy, especially in the retail segment, where risk mitigation procedures will be stringent.

In fact, the loan appraisal procedures were already stringent.  If we peep into the pre-COVID banking scenario, we find the banking industry was already crumbling under the burgeoning non performing assets (NPAs) or what is commonly referred as bad loans. Even as huge corporate loans are major contributors to this bad loan scenario which has already put survival of some big banks at stake, it is the retail segment mainly constituting individual borrowers, which was also facing the brunt. The brunt was induced by the banks as they had done away with the liberal loaning policy. In other words, the loaning in pre-COVID crisis had already become more stringent as banks while reviewing a loan application were observing certain stringent risk-measuring tools to decide whether to extend the loan or decline the request.

Now in COVID crisis, the banks have come under never-seen-pressure as they are visualizing unprecedented surge in bad loans in post-COVID era. The loaning norms are going to be more stringent and the prospective borrowers, those who look at banks for financial assistance through varied loan schemes, would be facing tough time while complying to loan eligibility norms.

Now, let’s have a lookout at the issue of credit scores in the context of the student loan which was denied to the parents for ‘bad credit score’. So, awareness about the subject makes a sense.While talking in the context of our J&K, the most interesting part is that most of the customers are unaware that their credit history is at the finger tips of any bank or financial institution. They are unaware that their behavior towards borrowing and repayment of loans earns them credit scores which are precisely defined as good or bad scores.

So, it’s the lack of financial awareness among people here which is a concern. Otherwise, the primary responsibility rest with the financial institutions to make their customers aware about nature and impact of financial transactions of whatever nature they conduct at their outlets. The awareness has not to be confined to the products and services they offer, but it has to be broad based. They have to regularly update their customers about the changing landscape so that total financial discipline in line with the envisaged rules and regulations is observed by them. Nevertheless, a financially disciplined customer is a golden asset for the banks/financial institutions.

What a credit score means?

It’s basically a number summed up on the basis of credit report – a summary of borrower’s past and current borrowing and his/her repayment history. This report is prepared by a credit bureau agency. If a borrower has been regular with his/her loan repayments, credit score is likely to be higher. Precisely, this credit score reveals the borrower’s repayment capacity and even helps the baks and financial institutions to assess the chances of borrower defaulting on the loan.

Meanwhile, when we think of credit scores, mentioning about the Credit Information Bureau (India) Limited (CIBIL) is inevitable. CIBIL, mostly referred in credit scores, is an agency that provides the credit score and report on an individual’s payments pertaining to loans and credit cards. It’s this CIBIL score which shows borrowers’ creditworthiness and indicates the probability of a default on the basis of their credit history.

Remarkably, there are other credit bureaus, namely , Equifax, Experian and CRIF High Mark. It is these credit information bureaus that generate credit reports.

How to earn good credit score?

In the given financial landscape and the stringent lending scenario, it’s inevitable for borrowers to maintain a financial discipline of highest order to register themselves with high credit scores. They should utilize the loan limit efficiently without diverting the funds from the core activity for which the loan has been sanctioned/disbursed. After availing the loan, they have to make it sure that they pay their loans installments well on time. If they own a credit card, then let them pay the bills in full onetime, rather than making a due payment every time. It’s equally important for them to be a guarantor for only those people whom they consider creditworthy. Never allow your cheques to bounce when presented at the bank counter.

Precisely, it’s in the fitness of the things to exhibit a safe appetite for loans and display good financial discipline to earn good credit score.

Does credit report contain details of savings and investments of the borrower?

No. A credit report (also known as CIR i.e Credit Information Report) is an individual’s credit payment history across loan types and credit institutions over a period of time. Wait does not contain details of your savings, investments or fixed deposits.

Will default in repayment of loan by the principal borrower affect guarantor’s credit score?

As all of us know, banks ask for a guarantor for certain loans as a means of security for the loan amount they provide. Let it be clear that a guarantor for any type of loan is equally responsible to ensure the repayment of the loan. In fact, the guarantor is as good as borrower. The guarantor provides a guarantee to the bank that he/she will honor the obligation in case the principal borrower is unable to do so. Any default on the payment of the loan by the principal borrower, will affect the guarantor’s Credit Score as well.

What do high and low credit score determine?

A high credit score essentially means less probability of a default. A low CIBIL credit score reflects high probability of a default.

How to correct errors in CIBIL report?

RBI has made it mandatory for banks to comply with an individual’s desire to access his or her credit report. If a bank declines a credit card or loan application, you can ask for the control number of your credit report. You can then contact CIBIL at info@cibil.com and communicate details of errors in the report.



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Bad Credit

Learn to avoid these credit card habits before you regret making costly mistakes

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Picture used for illustrative purposes only. Many still decide to confront bad credit card habits only after they are thousands of dirhams in debt.
Image Credit: Reuters

Dubai: Many still decide to confront bad credit card habits only after they are thousands of dirhams in debt. Here we discuss some lessons many regretted not learning before making mistakes that proved costly.

Although credit cards offer convenience, security, and rewards, overspending with a credit card and the interest and fees can bury you financially. So it’s important to know whether you possess such habits in the first place.

Four questions to ask yourself first

If you don’t know whether you have a bad credit card habit here are four questions to ask yourself to find out. If the answer to any of the below is yes, you are inching towards a credit card debtpile.

1. Do you pay only interest fees or minimum payments when you send in your credit card payment?

2. Have you ever paid your credit card late because you didn’t have the money for the payment?

3. Do you use your credit card when you don’t have enough cash?

4. When your issuer raises your credit limit, do you spend more because you can?

Bad credit card habits

While common mistakes include habitually paying your credit card late and taking out costly cash advances on your credit card, here are some uncommon-yet-dire mistakes that may slip under any user’s radar.

Habit #1: Missing out unauthorised or fraudulent charges

Keep in mind that one of the main benefits to reading your credit card statement is, it is one of the best ways to catch unauthorised charges and billing errors.

Don’t check your credit card statement for your balance and payment information, review the entire statement to verify your account activity.

By routinely checking your online or physical statement, you can also find out well before hand if your credit limit was lowered since you last checked – as it can change because of your credit habits or your credit history.

Habit #2: Paying only the minimum can cost you dearly

It is evidently easier to make the minimum payment and this is a habit credit card companies profit from as well.

Although paying just the minimum is more convenient than to figure how much extra you can pay towards your outstanding credit card bill, keep in mind that when you’re making only the minimum payment, you’re not making much progress toward paying off your credit card bill.

Moreover, unless you have a very low balance or a zero per cent interest promotion, you’re probably paying much more in finance charges than you have to.

Habit #3: Using your credit card more than your debit card

While it’s recommended you use your credit card to amass cashback rewards or points and also pay off your credit card balance every month, you shouldn’t opt to use your credit card over your debit card, if those aren’t the reasons why you would go about using them.

Your debit card is your direct access to the funds you should use for everyday purchases, like groceries, gas, clothing, and other expenses. If you use your credit card, it should be a decision with a plan for paying off what you’re charging on the card.

Habit #4: If you are transferring balances just to avoid payments

Although promotions like balance transfers are a widely recommended strategy to pay off a high-interest rate balance on your credit card, matter experts reveal that if you’re in the habit of pursuing such promotions to avoid paying payments on your credit card, this leads to amassing long-term debts.

Financial planners reiterate that many don’t realise that balance transfers typically have fees that will increase your overall balance if you’re never making payments toward the transfer. Moreover, if you’re making purchases on the card with such a promotion, the problem gets bigger.

Expert tips to take control of these credit card habits

Lesson #1: Pay your credit card in full each month

The best way to keep your credit utilisation ratio low and avoid costly interest charges is to pay your credit card balance in full each month – which also means you also don’t incur any large due.

It’s effective to control spending by not spending more than you can comfortably pay down each month, as this helps you reduce the likelihood of developing long-running credit card debt.

If you want to take in one step further, setting a monthly spending limit that’s well within your budget increases the chances that you’ll actually be able to zero out your monthly balance and avoid interest charges.

Lesson #2: Keep your credit utilisation ratio low

What it means by ‘credit utilisation ratio’ is essentially the link between your credit card balances and your aggregate spending limit. For example, a Dh2,000 balance on a credit card with a Dh5,000 credit limit equates to a 40 per cent credit utilisation ratio.

As a rule of thumb, your credit utilisation ratio shouldn’t exceed 40 per cent, and keep in mind that high ratios may adversely impact your credit score.

Financial advisors recommend aiming for a 30 per cent credit utilisation ratio, as that gives you some leeway to cover urgent one-off expenses, which can come unexpectedly as a result of maybe losing your job during the ongoing pandemic.

Lesson #3: Setting up customised spending alerts

If controlling your credit card spending is burdening you, it has been widely advised to set up customised spending alerts.

This will let you know when you’ve made an abnormally large payment or exceed a certain balance threshold and you also can pair these data alerts with security alerts to help flag any sham spending patterns.

Lesson #4: Using credit card rewards and points to your advantage

If you have a rewards credit card, you can use it to your advantage. If you have a pure cash back credit card, use any cash rewards you receive to put toward your account balance or directly deposit it into your savings account.

Alternatively, if you have a rewards points credit card, you can use your rewards to buy discounted gift cards to the stores you know, which will help save on future purchases without having to use your credit card.

If not, you could always redeem your reward points for cash redemption to put into savings or towards your account. However, ensure you know when your rewards expire to get the most out of them financially.

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When Can I Get an Auto Loan After a Repo?

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There’s nothing saying you can’t apply for an auto loan immediately after a repo, but the tough part is actually being able to qualify for the loan. Since many auto lenders don’t approve borrowers with a repo that’s less than a year old, you may have to consider in-house financing.

Repossessions and Your Next Car Loan

Unfortunately, most traditional auto lenders don’t work with borrowers that have a recent repo on their credit reports. When we say traditional, we’re referring to lending institutions such as banks, credit unions, online lenders, and the captive lenders of some automakers. These lenders often require a good credit score and clean credit reports.

Where does that leave you? Well, likely in-house financing is the next logical step if you need a car loan after a repossession.

More on In-House Financing

Buy here pay here (BHPH) dealerships use in-house financing. This way of auto financing involves working with the dealer who’s also your lender. There’s no need to find a third-party lender or preapproval – the dealer takes care of all that. This setup can be convenient, and often, borrowers are able to walk away with a vehicle the same day they first set foot on the lot.

Since these dealers may not check your credit reports to determine your eligibility for auto financing, your recent repossession generally isn’t an issue. If you can meet income requirements, prove you have stable work, secure auto insurance, and prove your identity, you might get into a vehicle after a repo with in-house financing.

Here are a few more details on in-house financing:

  • Used cars only – BHPH dealers only offer used vehicles. However, used cars are a good option for bad credit borrowers. They’re almost always less expensive than a brand-new car, and affordable is a good price when you need to get back on your feet after a repo.
  • Anticipate a higher interest rate – Without a credit check, lenders are taking a risk approving a car loan without knowing much about your credit history. To make up for this, they tend to assign higher interest rates. A high interest rate may be considered a good trade-off for an auto loan with bad credit in many cases, especially if you heavily rely on a vehicle to get by.
  • Credit repair may not be an option – If you get an auto loan with a lender that doesn’t check your credit, it’s a possibility that your on-time payments aren’t going to be reported to the credit bureaus. If you want to repair your credit with a car loan, ask the lender about their credit reporting practices before you sign on the dotted line.
  • Down payments are required – Few things are certain in the auto lending world, but one thing you can count on is needing a down payment if your credit is less than perfect. BHPH dealers often require a down payment of up to 20% of the vehicle’s selling price.
  • Prepare your documents – While a BHPH dealer may not check your credit, they’re likely to ask about your income and possibly your work history. You need proof of income to qualify for a car loan, no matter what lender you work with, so prepare at least a month of computer-generated check stubs. If you don’t have W-2 income, have copies of your last two to three years of tax returns.

Looking Forward After a Repo

When Can I Get a Car After a Repo?After one year, your auto loan options open up a little bit more and you’re more likely to qualify for a subprime car loan. Subprime lenders are equipped to assist bad credit borrowers. These lenders offer you a chance for credit repair because they report their loans and work with poor credit borrowers.

If you need a vehicle quickly, a BHPH dealership could be your first step in getting back on the road. Once some time has passed, and your repossession loses some impact on your credit reports, you can try for an auto loan that has the potential to repair your credit.

Here at Auto Credit Express, we know a thing or two about bad credit auto loans, and we have a nationwide network of dealerships that assist bad credit borrowers. We aim to match consumers to dealers in their local area that help with credit challenges. If you’re in need of auto financing, start right now by filling out our free auto loan request form. We’ll look for a dealer in your local area at no cost and with no obligation.

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Pros and Cons of Subprime Lenders and Loans

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A subprime loan is primarily a type of loan offered to borrowers that don’t qualify for conventional loans and are considered high risk due to various factors such as low income, significant outstanding debt, and low credit score.

These loans can also be called bad credit loans because they are the same; that is, they are only offered to people with heightened risk factors.

What is a Subprime loan?

Subprime loans are your type of loan that is generally offered to people who have heightened risk factors such as limited credit history, low income, low credit score, etc.

Unlike a conventional loan, subprime loans have high-interest rates. Technically, most of these loans have a subprime loan counterpart, including mortgages, auto loans, personal loans, etc. However, even though there is no official credit score cutoff for borrowers, people who have a credit score below 650 usually have a more challenging time getting approved for a conventional loan. And that’s where subprime loans enter the conversation.

Of course, getting approved for a loan depends on several factors. But, the most integral part of being approved for a conventional loan is a passing credit score, which some people don’t have. If you’re just starting to build your credit, this could be disadvantageous to you since you will have a hard time getting approved for conventional loans.

That said, subprime loans were created to help those with poor credit scores to acquire a house, car, financial assistance, etc. Such loans have different features that vary from lender to lender. However, most subprime has two traits in common: higher interest rates and high closing costs.

Types of Subprime Loans

If you’ve done your research on subprime loans, you can see that each subprime loan varies from lender to lender. But in actuality, there are three main types of subprime loans.

Subprime Home Loans

Mortgages, in reality, can be categorized into two main groups, mainly prime and subprime mortgages. Prime home loans are what you call conventional home loans that are the ones that you commonly see in the market. Subprime home loans are just prime home loans that have a slightly higher interest rate in simpler terms.

Subprime mortgages can be categorized into three main groups: adjustable rate mortgages, fixed-interest mortgages, and interest-only mortgages. Typically, subprime mortgages are only given to people who have credit scores below 650.

Subprime Auto Loans

Just like the case with subprime home loans, subprime auto loans are just your conventional auto loans, albeit with a higher interest rate. However, nowadays, it’s harder to get approved for a subprime auto loan because lenders are more strict in the assurance that the borrower will not default the loan.

To combat this uncertainty, most lenders nowadays are offering subprime loans with longer repayment periods to ensure that the borrower will repay them. Some lenders have a period that lasts for 69 months, and some go as far as 84 months.

Subprime Personal Loans

Personal loans are typically unsecured, which means they don’t require any collateral, making it risky for lenders to offer subprime personal loans for obvious reasons. You might as well opt for secured loans to have a lower interest rate instead.

Pros of Subprime Loans

Subprime loans usually have a poor image because of their higher interest rates. But they are not all that bad as there are also benefits to them. The most obvious benefit of subprime loans is that it’s easier for people to qualify for a subprime loan even though they have a poor credit score or little credit history. This means that it will be more convenient for people to build their credit if they’re just starting.

Since you can use a subprime personal loan, it will also be easier for people with bad credit to consolidate their debts, improving their credit score. This will also make their payments easier and manage their finances better. Subprime loans can also enable people who are just starting to build their credit to become homeowners or buy a vehicle when they couldn’t opt for conventional loans.

Cons of Subprime Loans

Since subprime loans carry huge risks for lenders, they counteract this by giving them higher interest rates. And the resulting scenario is the person defaulting the loan because they can’t keep up with interest.

Not only that, but subprime loans also carry a lot of fees such as processing fees, closing costs, up-front fees, etc. These can add further to your debt, which can be a real burden if you’re on a budget.

Takeaway

Subprime loans are not to be trifled with if you don’t know what you’re getting into. Before you apply for one, ensure that you have exhausted your options to get a conventional loan. Also, do your research first before taking out a subprime loan. Balance its pros and cons and ensure that you won’t be taking a huge loss in return. Lastly, subprime loans should be taken as a last resort, not your first choice.

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