What to do if your Credit Score reduces?

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What to do if your credit score reduces? A low credit score can cause rejection of loan applications and can increase your interest costs. But there is no reason to panic or stress. It can be fixed, without any cost. You will have to follow a disciplined approach of continuous improvements and monitoring.

Here are 5 proven ways of preventing your score from reducing further and improving it over time –

1. Don’t take any more loans

Your net worth is the assets you have (cash, investments, property etc) MINUS your liabilities (personal loan, credit card bill etc). Reducing credit score is typically accompanied by a reduction in net worth. Don’t reduce it further by taking more loans. Keep a target credit score – apply for an additional loan only if you hit that target (say 720). Applying for a loan also reduces credit score because banks / financial institution will make a query for your credit report with credit bureau (e.g. CIBIL) which reduces your score. Loans also have interest and processing fee charges which can sometimes be quite high.

2. Reduce credit card expenses

Credit card utilisation (i.e. % of your credit card limit that you have used up) is an important part of your credit score. As your utilisation % increases, your credit score reduces. This is because financial institutions see you as credit hungry and start avoiding giving more loans or credit cards to you. Move your credit card expenses to debit card till your score improves. This will reduce your utilisation % and will increase your credit score.

3. Repay overdue EMIs

Delays on loan EMI is the biggest reason for credit score to reduce. For every EMI or credit card payment that you miss, the bank / financial institution reports this to 4 credit bureaus (CIBIL,    Experian, Equifax & CRIF) which shows in red or orange colour on your credit report. Repay your late EMIs or credit card bills at the earliest. This would mean cutting some other avoidable costs and requires discipline. Remember, your credit history cannot be changed – it will be with you for your entire life. Don’t paint it with red colours. If you are late on Credy EMI, pay here – https://www.credy.in/pay. Part payment is allowed.

4. Improve budgeting

Lot of times the credit score reduces because of financial stress. It could be because of medical reason, loss of job, expensive life events like marriage or unexpected emergencies. You should find ways to reduce costs (by avoiding unnecessary expenses) and increasing income (for e.g. via husband/wife, working additional shift etc). This sounds easy but is hard to implement. It will not show results overnight. You will need to have the discipline for some time (at least 6 months). Once you meet your target credit score, you can relax for some time and resume some expenditures that you stopped. But remember to continuously monitor your credit report.

5. Monitoring Continuously

There is a famous saying – if you can’t measure something, you can’t improve it. Similarly, if you can’t monitor something, you can’t tell if your efforts of improvement are working. You should check your credit report at least once a quarter. You should check the following:

  • If all information is correct. Sometimes financial institutions report wrong data. If that is the case, you should immediately point it out to them and ask them to correct within 30 days.
  • If your score has reduced, the reason for the reduction in the score

Credy is soon launching Credy Watch – a way to monitor your credit report, get tips on improvements, flag any potential errors on your report as well as help you track changes over time. Look out for updates!

Banks vs NBFCs vs Fintechs – How to Choose your Personal Loan

If you are an urban, tech-savvy person, chances are good that you have come across many loan options – Banks, Non-Banking Finance Companies, NBFCs (e.g Bajaj Finance) or Fintech Startups (e.g. Credy). While each of them has a unique place in the financial ecosystem, it can be hard to determine which option to go for when you have a need for money. In this article, we will explain to you the main differences between these finance options and how to choose one that fits your requirements.

Let’s start with a brief overview of the options available:

  1. Loan via a Bank – Banks are the oldest and largest kind of formal lenders. Banks “raise” (i.e. get money from investors or depositors) money at a relatively low cost (remember your bank saving rate of 3.5%) and have the benefit of a large user base. However, they are grappled with internal bureaucracy, slow technology adoptions and rigid rules which do not adapt to changing times (e.g. many banks won’t give a loan to employees of startups, even though they earn well!)
  2. Loan via NBFCs (Non-Banking Finance Companies) – NBFCs are the next biggest class of formal lenders. NBFCs generally specialize in financing certain asset classes (e.g. Bajaj Finance has a strong hold on consumer durable financing). They are more flexible than banks but still have a lot of manual processing steps and slow adoption of technology.
  3. Fintech Startups – Fintech (Financial Technology) startups are tech-powered companies which aim to innovate in terms of product, technology and customer service methods. They usually have quick disbursal of loans and offer better user experience along with some promotional offers (e.g. Credy offers fast personal loans with instant loan approval and up to Rs 5000 for referring your friends!)

 

The Comparison

Now that you know what these companies essentially are, here is a comparison of their major features.

Feature Banks Large NBFCs Fintech Startups
Time to Get Money Typically 5-7 days Typically 4-6 days Typically 1-3 days
Convenience Low Medium High
Reliability of Customer Service Low Medium High
Interest Rates 10-15% 14-20% 20-27%
Flexibility in Rules Low Low Medium
Paperwork Involved High Medium Low
Specialized Products Rarely Frequently Frequently

Process Comparison

Process Step Banks NBFCs Fintech Startups
Document verification Generally manual Generally manual Generally automated
Agreement signing Generally manual Generally manual Generally automated
KYC Generally based on self attestation, signing of photo copies Generally based on self attestation, signing of photo copies or eKYC for digitally advanced NBFCs Typically eKYC or scan image upload based
Other paperwork (e.g. cheques) Generally high Generally high Generally low

So How Do I Choose?

As you can see, Banks are best in terms of interest rates that they offer, and Fintech Startups are best in terms of user convenience and speedy service and Large NBFCs in terms of specialized financial products.

If your requirement is of say Rs 30,000 for 3 months, the total interest cost would be as follows:

Loan Provider Total Interest (Rs)
Banks 627
Large NBFCs 854
Fintech Startups 1,132

The hyperlinks take you to details of the loan terms – EMI, interest, principal etc.

As you can see, the difference in total interest between Banks and Fintech Startups would come to around Rs 500. If your requirement is urgent, this difference is something you may be willing to pay for speedy service.

Recommendation: If you want a fast personal loan for less than Rs 2 Lakh, it is better to go for Fintech Startups than Banks or Large NBFCs.

Recommendation: If the amount you require is more than Rs 2 Lakh, you can consider Banks or Large NBFCs.

Another factor to consider is your profile.

Recommendation: If you have any delays in past loans or credit cards, it is better to go for Fintech Startups than Banks or Large NBFCs since Fintech Startups are willing to more comprehensively look at your profile than just your credit score. Other lenders may waste your time in reviewing your application and then tell you it is rejected because of previous delays which may be more than 5 years old. As a healthy financial practice, you can generate your free CIBIL report here and your free Experian report here.

Recommendation: If you work in a startup / small company or have changed jobs or moved cities recently, banks or Large NBFCs may decline your loan application. For such a profile it is better to apply to Fintech Startups.

Recommendation: If you want a fast personal loan, the obvious choice is Fintech Startups.

NBFCs specialize in specific products – like Bajaj Finance for consumer durables or Muthoot Finance for gold financing.

Recommendation: If your requirement is for a specialized asset, you can go for the relevant NBFC.

To summarize, consider the loan amount, your profile, urgency and usage of your loan to determine the right loan option for you.

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Credy is an online loan startup which provides fast loans that are customized to your needs.

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6 Practical Tips When Taking Personal Loans

Personal loans are a quick way to get money for a short-duration financial need. You can use it for refinancing a large credit card bill, paying for a medical emergency or to pay for lumpy expenses like children’s school fees. While personal loans provide a convenient way to convert large expenses into easy EMIs, there are some important things to keep in mind.

Based on our experience of servicing and interacting with thousands of customers applying for personal loans at Credy, we have compiled these 6 practical tips to keep in mind when taking personal loans. It will help you save money, improve your credit score and satisfy your financial requirement without causing stress.

1. Know the Need

Personal loans are easy to manage when there is a specific expense that the money is used for. The expense can be for various needs – consolidating different loans & credit card dues, family occasions, medical emergency, lifestyle expenses like travel and so on.

Having a specific expense in mind has the following benefits:

  • One-time nature: you know that the important family occasion won’t come again for some time or that the medical emergency was an exception. This allows you to pay back the EMIs with your monthly disposable income once the expense is taken care of.
  • Knowing the loan terms: when you know the need, you know how much amount you need and for how long. If your credit card bill is Rs 40,000 and you want to convert that into EMIs via a personal loan, you know the loan amount should be Rs 40,000.

Customers who do not have a specific need in mind when taking a personal loan eventually end up

  • Confusing loans with income – a personal loan is not a source of income. You have to pay it back, with interest. Taking a personal loan repeatedly because your monthly expenses are more than your monthly income is eventually going to lead to large interest expenses, delays and eventually a poor credit score.

2. Choose the Right Lender

There are many loan options – banks, NBFCs, online lenders, informal money lenders and so on. Not all are same, and not all would offer what your unique circumstances require. Identify your priorities – is it getting the money quickly? Is it having flexibility in loan terms and repayment options? Or is it saving interest cost? Here are some useful guidelines:

  • Speed: If you need fast loans, you should pick lenders who have an online process. Online process doesn’t just mean having a website application. Check what their KYC process is, check how they take documents and signatures on documents etc. The speed that an online process gives, a paperwork-heavy and manual process will never be able to give.
  • Interest Rates: You should evaluate for yourself if interest rates are a major concern for you. Small ticket personal loans are generally less sensitive to interest rates. For e.g. if two personal loan options have 3% difference in interest rates, total interest paid on a Rs 50,000 6 month loan would be different by less than Rs 500!
  • Customer Support & Transparent Process,: This is probably the most important. A lot of lenders have hidden terms, undisclosed steps and third-party dependencies. The last thing you want in case of an urgent need is the lender telling you the process is stuck in some other department and no one can help. Rest all being the same, go with lenders who have an easy process and helpful customer support.

Based on your needs, you may prefer a lender who is fast and gives good service than a slower option with long opaque processes.

3. DON’T Overborrow

Customer support: But sir, why do you want just Rs 50,000? Your loan is approved for Rs 2,00,000

Me: Umm.. because I have to pay interest?

This actually happened when I got a call from a loan company after I checked out their website. Loan companies will always want to give you a loan higher than your need. For them its simple economics – their processing costs are almost the same whether the loan is Rs 50,000 or Rs 2,00,000. So why not give the customer higher amount and earn more?

As a customer, you have to make sure you borrow only the shortfall you have. Only the amount that you are lacking. This requires discipline, just as most financial best practices do.

Another way a lot of our applicants end up overborrowing is trying to pay off one loan with the other. DON’T do that. You will end up churning loans and enter a debt trap. Borrow what you need. Anything more is giving your hard-earned money for free to lenders. At Credy, when we reject such applications, we advise customers to avoid getting into a debt trap.

4. Ask For Detailed Loan Terms

Loan terms are not always very clearly communicated by the lender. You should ask for a one-pager of loan terms that covers things like

  • Processing fees & interest rates
  • Late fee structure
  • Prepayment fee and eligibility
  • Loan recall clause
  • Cheque bounce charges
  • Legal charges

You should calculate the amount of total late fees that you will have to pay if you are 1 month late. Make sure late fees and lender’s terms are reasonable and not like that of a “loan shark”.

5. Protect your Sensitive Data

A lender has access to a lot of your sensitive data. Make sure to ask them why they require that data and how securely is it stored. Here are some guidelines

  • Use trusted websites: If you are going for an online loan, check the content on the website, contact information and details of the company management. Make sure that the website URL has https:// and a green address bar like this:

Screen Shot 2017-11-21 at 9.52.27 AM

  • Ask what your information is going to be used for: Not knowing how your data is going to be used can be risky for you. For e.g. sharing information like Aadhaar, PAN, credit card numbers etc. for no good reason is unadvisable. Some websites forward your leads to other companies without informing you. When those companies make a query on your credit score via your PAN, your score goes down. And you don’t know how many hits will happen!
  • Protect your Aadhaar:
    • When giving your Aadhaar details to a company check if they are licensed to verify your Aadhaar number. For e.g. Credy has implemented controls around Aadhaar data to be compliant with UIDAI and Govt. of India guidelines and is licensed with Khosla Labs to verify customers’ identity via Aadhaar.
    • Never store your Aadhaar number on your mobile phone. Remember: Aadhaar Number + Mobile OTP = Your Signature So if you lose your phone, and it has your Aadhaar number on it, someone can pose as you and sign a document or do KYC as you.

6. Repay on Time & To The Right Party!

This sounds obvious but sometimes is hard to implement. If you are facing financial troubles and don’t have the money to pay the personal loan EMI, you can do two things

  • Cut down any extra costs. Look closely at your expenses – there must be some expense that is avoidable at this point in time.
  • Borrow from friends just for the EMI payment. Don’t go for an additional loan. Borrowing EMI amount from friends and paying ensures that your credit score is not affected. A bad credit score will ruin your chances of getting loans in future and cause considerable stress and cost in arranging finances from alternative sources.

Be careful to ensure you make repayments to the right party. Be extra careful when making cash payments. We had a customer who was paying his EMIs regularly in cash to a bank agent. Later he found out that the agent was not depositing the cash on time and using it for his own expenses! The customer’s credit history got permanently damaged because of that.

Make sure of the following when paying by cash:

  • Check for some company identification of the collection agent
  • Ask for a payment receipt/email to be sent after you make the payment. If the receipt is not received within 48 hrs, escalate the issue.

Take care of above to a get a good deal on your personal loan without affecting your long-term creditworthiness.

Let us know in comments if these tips were helpful!


Harshit S Vaishnav
COO & Head of Credit,
Credy

Credy is a Bangalore based online platform that provides fast online loans for multiple requirements like credit card refinancing, education expenses, medical emergencies etc. We aim to be a trusted and responsible lender, and believe that educating the customers about best practices is important.