“How to improve your credit score? dos and don’ts”

You must have recently come across the advertisement by a leading bank saying that ‘if you have Credit Score above 750, avail home loans at cheaper interest rates’. For the first time in India, this kind of an offer of lower interest rate has been made by any bank or lender based on the Credit Score. Now a day’s financial institutions, banks, credit card companies and money lenders use Credit Score Check to approve loans or credit facility to customers.

What is Credit Score : Your credit score is a statistical number based on your credit history, repayment habits and other financial data collected from financial institution by the rating agencies. Your Credit Score is an indicator of your Credit Worthiness. This data is collected by the rating agency based on a key or unique identifier like Permanent Account Number (PAN – issued by the Income Tax Department in India) or SSN in USA. Each rating agency may assign different weightage to different parameters used for determining credit score. Generally, it ranges between 300 to 850 points.

With the credit score check, the lender gets an idea about the probability of default by the borrower, in case a loan / credit facility is given to him/her. Higher the Credit Score better are the chances for getting a loan at cheaper rates. Hence it is important for you to do the Credit Score Check before applying for a fresh loan or credit. A credit score below 600 is considered poor and generally the financial institutions avoid loans to such individuals. By maintaining financial discipline you can also improve your Credit Score. The very small things or ignorance can seriously damage your credit worthiness. By paying little attention to these small little things you can improve the credit score and avail cheaper credit facilities.

To improve your credit score, you should follow certain dos and don’ts.

Dos

1. Never delay the payment of installments due on existing loans.

2. Make credit card bills payment always in time. If possible, use the ECS or Auto debit facility on your card bills payment, so that there is no chance of forgetting the bill payment on due date.

3. If possible, try to prepay the existing loans. Making a little extra payment over and above the due EMI or installments not only helps you reduce the interest outgo but also helps improve your credit score.

4. Maintaining good and long banking relations with existing banker helps you increase the credit score. Frequently changing your banker, especially the business related credit facilities, can bring down your credit score.

5. Also make payment of your utility bills like electricity, mobile, insurance premium, municipal taxes etc in time. Though these don’t get reported directly for the credit score check, but these help you maintain financial disciplined life.

Don’ts

1. Do not take different loans from different banks. Try to use maximum credit facilities from one or two banks. For example you have two housing loans, two car loans and one personal loan each of this from a different bank. This kind of arrangement will pull down your credit score. Try to shift all these five loans to one or max two banks.

2. Do not rotate the credit card balance from one card to another card. Rotating balance from one card to another means, you don’t have means to pay the credit card bills. This seriously damages your credit worthiness.

3. Do not fully utilize or over utilize the credit card limit. In case you reach above 90% limit regularly, ask the credit card issuer to increase your credit limit.

4. Do not discontinue your old credit cards without any reason or because you have taken a new card. Longer the credit history with regular bill payments, better the credit score.

5. Do not take too many credit cards from different banks. Maintain maximum 3-4 cards with same number of banks. If you use these cards regularly and make on-time payments of the card bills, your card company would be happy to increase your card limit.

6. Do not withdraw cash from CREDIT Cards via an ATM unless it is an extreme emergency. Frequent cash withdrawal from credit card account brings down your credit worthiness, instead use Debit Cards linked to your savings account for cash withdrawals.

Try to obtain your credit score sheet ones in a year, so that you know where you stand. In case you find any errors in the reported transactions on your Credit Score sheet, immediately report the same to the concerned financial institution for correction and updating the same with rating agencies, especially when you are planning to take a fresh loan / credit facility.

Financial Discipline is the mantra for Happy Borrowing.

Key Investment Considerations

Friends,

What makes you select an asset for investment? Apart from Risk and Return?

The key considerations are :

Liquidity and Marketability : Is the ready market available for the asset ? How fast that asset can be converted into cash ?

Actual Returns, Post-tax Returns and Inflation Adjusted Returns : What are the annual returns on the asset? What is the tax implication on returns thus generated ? Is the post tax return more than inflation rate?

Safety – of your funds, safety of transactions : How safe is transacting in the asset ? While investing or while liquidating are your funds safe? Can you be cheated of your funds?

Documentation and cost of documentation : While investing in asset, what kind of documentation required? Is the registration / transfer mandatory for investment? How lengthy is the documentation process? What are the costs involved in documentation – like lawyer’s fee etc?

Cost of transaction : Are there costs involved in transaction? How much of your investment would get adjusted towards that cost?

Expertise and efforts required in transacting an asset : What level of expertise required in asset selection and timing of the transaction? How much involvement in transaction is required?

Ease of Investment / convenience : How easy or difficult it is to make the transaction? Can you do it from home / office or need to move out? Very time consuming or less time consuming?

None of the assets have every criteria in your favor. You will have to select the best combination as per your taste and requirement.

Happy Investing.

Continued – Repay that loan – ASAP

Friends,

I continue our discussion from yesterday to repay that loan as soon as possible. Why and How ?

Why : Because it makes you eligible for higher credit limits. This works in two ways. First your credit rating goes up which ensures that you are a preferred borrower for any financial institution. Because, if you PRE-PAY your loans it increases your CIBIL score. Second, you own the asset after payment of the loan. That increases your net worth. Also, since you don’t have a loan outstanding, you are eligible for higher credit limits, because you can pay more as an EMI.

How : The biggest challenge is how to pre-pay. For the people with certain sources of income it is easier – like salaried people. In order to prepay the loan, you need to revisit your investments. If you have borrowed at a rate higher rate, than the rate of return on your investment, you need to stop such investments, unless these are for emergency funds. You can even go to the extent of liquidating such investments to pre-pay the loan. For example you have taken a 5 years car loan of Rs. 5,00,000 which is generally between 12-16% depending upon the Financial Institution. And you have an FD for Rs. 3,00,000 which earns between 8.5 to 10% yearly. If this FD is not for your emergency fund, it makes sense to prepay the loan by liquidating the FD. You will save a lot of money on the interest differential. The difference is of 3.5% on lower side and up to 6% on higher side.

In above case if you have taken a loan at 12% annual with 60 months EMI you will be paying approx Rs. 11,125 per month and you would end up paying total Rs. 6,68,000 approx. But if you make a down payment of additional Rs. 3,00,000 from your FD, you will be paying just Rs. 4,450 per month as EMI and you end up paying total Rs. 5,67,000 only. That’s a cool Rs. 1,00,000 less. AND since you can afford to pay an EMI of Rs. 11,125 per month your car loan will not require to be continued for 5 years. You will finish this in just 20 months saving an additional Rs. 40,000 for you. So by prepaying an amount of Rs. 3,00,000 you make a cool saving of Rs. 1,40,000 on this deal.

The another way of pre-paying is by making additional payments in the loan account from your additional savings or additional incomes every month. You can benefit from this additional payment as it is adjusted against your principal outstanding. So when you make next EMI payment a higher amount gets adjusted towards principal.

The following two tables tell you how it makes the difference. In the first case you continue to pay only the fixed EMI so your loan will continue for full 5 years. But in the second case whenever you have an additional money, you use it for pre-payment. You can see that a higher amount is getting adjusted towards principal with each EMI payment. This will make a big difference towards the end. In the first year only you have saved Rs. 2,000 towards interest and there is a difference of almost Rs. 900 per month from 12th month in amount getting set off against principal. This will further increase as you continue the pre-payments.

So, in case you have any question on this feel free to comment.

Happy repaying to you all.

Set a Goal – A Financial Goal as well

Friends,

During placement activity, I had to face a big challenge – the challenge of ‘Target‘. Often students would opt out from the ‘Campus Recruitment’ after the pre-placement talk of a company citing the reason – It’s a Target Based Job and I don’t want to do a target based job.

I am really really surprised that how come anybody in this world live a life without any target. For whatever we do there is a target / objective / goal and there has to be one. Without target or goal or objective doing anything is useless.

Similarly, when I interact with people during my ‘Investor Awareness Programs’, I often come across people, who simply invest – without knowing what is the Objective of their investment. During discussions have come across many people who complained about “Negative Returns” or even “Capital Wiped-out” due to investment. On probing further they would tell that they “Simply Invested in XYZ asset”.

Our biggest challenge is this – Simply Invested. If you follow this practice of ‘Just Invested because my friend said or the agent asked me to do’ be prepared for shocks, and sometimes the serious shocks. Plan for your Financial Goals. We all know about “SMART” Goals. So set SMART Financial Goals also. If you have limited knowledge of investment option, engage a qualified financial adviser. Pay for his services and I am sure, you will not experience “Shocks”.

Happy savings and investing.

Below are some financial goals.

Start Early – It Grows More

Friends,

Starting early is always good – whether it is starting the day or starting the career or fixing your financial goals. Early start will always get you a little extra. But in case of investment starting early gets you too much extra.

Have you ever heard that story of a wise man and the king. The wise man offered a deal to the king that the man would give 1 Bag of Rice (100 kg) every day to the king and in return the king would give just 1 grain of rice on the first day, 2 grains on the next day, 4 grains on the third day and would continue to give number of grains doubling from the previous day. The deal was just for 30 days. The king laughed at the man and accepted the deal.

Tell me who gained in this deal?

Till the 25th Day, the King was enjoying. Till 27th day he was still laughing because he had surplus of 6 bags. On 28th day his smile vanished. And the king ended up with -138 bags of rice on 30th day. That’s the power of compounding. (Here we have assumed that 1 standard grain of rice weighs just 1/64 grams or 64 grains = 1 gram).

Imagine if the deal continued till 40th day, how many bags would the king had given? Any estimates? No.

1,71,759 bags! Uffff ! Can’t imagine … That’s the power of compounding. 

To get the best advantage of compounding, you must start early. Even a year makes a lot of difference. On 31st day the king would be – 305 bags. That means just one day made a difference of 167 bags.

Similarly even a little higher rate makes a huge difference in the total outcome. In the above deal if the king had agreed to double the number of grains every second day in that case he would have remained in surplus till 54th day and by 60th day he would have lost just 276 bags of rice.

Compare the difference in above two deals. Similarly, your money grows much faster if you lock it even at a 1% higher return. The difference will be visible at the end of 15-20 years investment period.

Happy investing to you!!

Are You Financially Secure ?

Friends,

What do you think – Are U Financially Secure?

Oh! Yes. Good.

What do you mean by being Financially Secure?

Having lots of money – being rich – loaded with Cash? Am I correct?

Yes.

Actually NO.

Having lot of Cash or being Rich, actually is not being financially safe and secure. Even richest of the people have faced trouble because they were not “Financially Safe and Secure”. So what is it ?

It involves following parameters :

1. Being debt-free : We live in a “Debt Burdened” society. For even smallest of our needs the credit is available at a throw of the hat. To attain financial security the very first requirement is being debt free as soon as possible, especially get rid of consumption loans asap.
2. Being in control of your expenses : Your expenses shouldn’t control you, rather you should control your expenses. Living in a consumerist society, we overspend frequently and then regret later on. This brings in lot of financial insecurity, if it becomes a habit. So control your expenses.
3. Consistently increasing your net worth : Your net worth is ‘Excess of your assets over your liabilities. Here we consider only financial liabilities and not the social or professional responsibilities. Work systematically to grow your assets and reduce your liabilities in order to achieve financial security.
4. Not being forced to work at a job you dislike just to pay the bills : This is becoming a major challenge in debt ridden society. We continue doing a job, which we don’t want to do, just because we have EMIs to pay. If not working for 2-3 months – car will be taken away by the bank, gadgets will be taken back etc etc. Avoid this situation. Work where you can give your 100%+, willingly.
5. Knowing how to save for things you want : Don’d depend on just EMIs to buy gadgets for yourself and family, rather save for that. Add one at a time. Enjoy the gadgets, enjoy your money but only to the extent you can afford to.
6. Knowing the people you love and things that are important to you are protected against big uncertainties : Protect your family and loved ones against financial instability due to any controllable or uncontrollable reasons. Every other day, on social media we see request for financial help due to medical emergency, accidents or some other reasons. This should happen to your family. Plan your finances in such a way that they are protected. You or them don’t have to look at friends and relative for financial support.
7. knowing that when you retire, you’ll have money to live on : Plan for your retirement. Don’t think that your kids will take care of you. Rather you should be in position to give them always. Remain financially independent even till your last time. Plan for retiring RICH with steady flow of enough funds to live on.

If you feel that you have taken care of most of the items above, you can sleep happily, because you are financial Secure and Safe.

Congratulations!

Read this also.

http://www.investopedia.com/articles/retirement/06/10secureretirementtips.asp

And this as well :

http://www.kiplinger.com/article/saving/T065-C014-S001-eight-keys-to-financial-security.html

And this as well if you get time :

http://www.readersdigest.ca/home-garden/money/7-ways-create-your-financial-safety-net/#urRzqjggZqFwMEMi.97

First Thing, First

Friends,

Hope you have planned your savings and investment, if not then immediately start working on that. New Financial Year is approaching. Start working on your Financial Plan, so that at the end of the FY you are not in a problem, how to save tax and where to put your savings.

Before investing into any asset or asset class it is important that we decide our investment objective – Why I am investing? What is the time horizon for investment? What are my cash inflows? When I need the money? How much Risk I am willing to take? I want capital appreciation or regular returns? Can I put a large sum in one go or I will be investing in small trenches regularly or as and when cash is available? What are the Tax considerations?

By answering to the above question, you can plan better your investments and there are better chances that you will be able to meet your investment objective. You can have different investment plans for your different investment objectives. For example you have just started your career and you plan to own a house after 10 years. You can make one investment plan for this objective. On the other hand you plan to marry in next 3-4 years and you want to save for your honeymoon. You can make a different plan for this.

Why you need two different plans for the above two? Because each has a different time horizon and different purpose. In first case you require cash after 10 years, with longer time period you can take higher risk, but for the other time is 3-4 years and you can’t take a high risk. Also the first one has an objective – asset creation, while the second one has a consumption purpose. So, each of our investment need requires a different plan.

While planning an investment we take into account the Risk associated with it and the Reward (Return) for taking that risk. These are the two main considerations. Apart from that very important consideration is Tax associated with it. Liquidity and Marketability of the Asset, documentation and cost of documentation associated with the asset, ease of investment, safety and security of transactions are the other consideration.

Consider these before making an investment.

Must Use the PLASTIC, but Judiciously.

Friends,

We have a very good invention from the previous century, rather TWO very good inventions, these are very very useful – Plastic and The Plastic.

Now why I am talking about plastic in my Financial Tips Blog? Yes, it’s the plastic invented by Banks, which is an excellent handy tool for us in this century – The Credit Card – your plastic money.  It has made the a lot more convenient. And a lot more difficult for some. I suggest use it as much as possible, but be judicious. It’s a sort of double edge sword. My experience of using it has been so far excellent.

It saves you a lot of trouble of carrying cash always with you. Helps a lot in emergency. I have been using it for more than a decade and half. With the increased acceptance, it’s like a Need now a days. The following image describes it all.

Why I am suggesting you to use it? Now the banks pay you between 3-6% interest on your savings bank account. A middle income family on an average spends around 25-30 thousand per month. If everything is spend in cash, you will not earn any interest on that, as most of us withdraw the cash for monthly expenditure at the beginning of the month and keep it at home. But if you use card for payments even for up to Rs. 20,000 per month, you save a little extra by earning a little interest on that and that to without the hassle of carrying cash.

Also this helps in reducing black money in the system. How – we will discuss some other time 😉

But don’t get tempted for shopping because you have the plastic with you. Control your temptation to shop because the card gives you only facility and not the money. Money has to be earned by you. Any tempted buying / shopping will dis-balance your budget for the next month.

Don’t use the Credit Card for cash withdrawals from the ATMs. It’s the costliest credit. It’s not just the interest on your cash withdrawal which you pay, the moment you withdraw the cash, your credit card company starts charging interest on your other purchases also, which are otherwise interest free. So, only in case of extreme – EXTREME emergency only use CC for cash withdrawal.

Don’t transfer the balance from one CC to another CC. The moment you transfer the balance, the credit card company starts charging interest on your other purchases which are otherwise free.

Don’t except the offers of “Pre-approved loans” from CC Company. These are very expensive pre-approved loans. The effective interest rate is more than double the interest rate charged by the bank on personal loans. If you badly need a loan try to borrow from your bank first.

If due to any reason you have withdrawn cash from Credit Card or have taken a pre-approved loan or have transferred the balance from one CC to another CC, clear it ASAP. Don’t carry it for long.

In case of emergency, if you have good relationship with an outlet which accepts Credit Cards it can help you with cash. Though for a cost. Normally outlets with lesser number of swipes pay between 1% to 1.8% of the transaction value to banks for using the swipe facility, whereas in case of bigger outlets with large number of transaction or heavy transaction don’t pay any charges. They get their cash transferred on completion of settlement cycle. Having a good relationship with an outlet which is accepts cards and generates sufficient sales, can help you. I have seen this facility being used by individuals and small businesses, in business centers of the country with large “Cash Rich” outlets to meet their cash needs. The ‘Cash Rich’ outlets generate extra income by lending “Assured Return” credit.

With improvement in technology and this facility is going to be more and more useful. The below days are not far off.

Are You Taking Care of Your Health?

Friends,

We Indians ignore our health the most. We are least bothered about healthy lifestyle, exercising, good food habits etc. On one hand we neglect the health issues and on the other hand we don’t even take care of costs related to such ignorance.

As our lifestyle is changing we are getting exposed to higher health risks. In this case there are two very important things every youngster must think of :

1. Leading a healthy life and paying attention to her / his health

2. Getting adequate health insurance for self and family.

There’s nothing better than leading a healthy life, but that’s not enough. Due to increasing heath hazards, risk and cost of medical care every family shall take a health insurance policy. There are various policies available to take care of your health insurance needs – from plain Individual Health Cover to comprehensive family covers. Depending upon how much premium you can afford to pay comfortably, you should buy a health policy.

There are individual health covers, which offer reimbursement of hospitalization and medical care expenses for accidental and disease related hospitalization. The premium for this plan is based on Sum assured and age of the insured. Then there are Family Health Cover. The plan is similar in nature to individual health cover, but two or more family members are covered by the plan. Buying a family plan reduces the cost for buyer. There are Family Floater Health Plans – these plans offer an advantage of increased risk cover for each family member. How this differs from Family health cover

In the Family health cover suppose a family of 4 is insured for Rs. 1 lac each. Than in case of a claim situation the benefit is limited to Rs. 1 lac per family member + accumulated bonus. Suppose there is a total expense of Rs. 1.75 lacs on medical care of one family member, then the reimbursement would be limited to Rs. 1 lac (+ accumulated bonus if any). Whereas in case of a Family floater policy, suppose a cover of Rs. 4 lac is taken for a family of 4, then in case of any claim situation maximum Rs. 4 lac can be claimed, individually or jointly. For example in above case Rs. 1.75 lac will be reimbursed fully.

Than there are plans like ‘Critical Illness Cover’ – for people having family history of critical diseases these plans are good. Plan like ‘Hospitalization Cash’ – for the sole breadwinner of the family and having daily earning / contractual jobs or who can’t afford loss of income.

Before buying any health insurance plan you must carefully read the offer documents and compare with other health plans from other companies are available. Health Insurance Premium is eligible for Income Tax exemption also (up to Rs. 15,000 for AY 2015-16 and up to Rs. 25,000 in AY 2016-17). For elderly people the exemption limit is higher.

For more details read the handbook from IRDA. It’s a very good resource to understand Health Insurance

Click to access health_insurance_handbook.pdf

As I said compare before buying. The policybazaar.com offers very good services for that. Just check yourself

http://www.policybazaar.com/health-insurance/health-insurance-india/

Healthy Living and Happy Living

Take a Ride(r) When Getting Insured

Friends,

It’s very important for all the breadwinners of the family to be insured adequately. There is no need to get “Over Insured” or remain “Under Insured“. By Over Insuring, you are actually not achieving any objective rather you are wasting your money. Remaining Under Insured, will leave your family unprotected in case of any exigencies. So, look into your insurance needs properly and get proper insurance plan for yourself. It is important that insurance plans are kept LIVE (in force) by paying premium in time. With the facility of ECS and Auto Debit this can be done easily.

With your insurance plan, take RIDERS also. Riders are additional benefits available with your main policy on payment of additional premium, which is very very minimal. Riders like ‘Accidental Death Benefit’, ‘Critical Illness’ and ‘Permanent Disability’ are very important to cover the risk of modern life and increasing health risks. As the life style is changing and we are exposed to new risks, we must add these riders to our main Life Cover. By paying a very small amount as additional premium for Riders, you can add substantial risk cover to main policy. The Rider risk cover amount is in addition to your original sum assured.

Say for example XYZ buys a life cover of Rs. 50 lacs and he adds Rs. 25 lac Critical Illness and Rs. 25 lac permanent disability rider to that. So in case of death of XYZ by Cancer or Brain Hemorrhage his family will get Rs. 75 lac (50 + 25). In an unlikely event of XYZ getting paralyzed (causing permanent disability) due to Brain Hemorrhage his family will get Rs. 1 crore (50+25 + 25) due to riders. Adding these riders provides for additional cost of living for the family, due to the unlikely event.

In Financial Planning there is a concept of “Self Insurance” also. We will discuss that in upcoming posts.

In case you love your family, which I am sure you do, get a proper insurance cover with riders.

Happy Living.