Manage your Credit Card and Personal Loans

Use your credit card right! Never exceeding 40% of your credit limit has a very beneficial effect on your credit score. This shows your credit limit is high but you have not burnt it up and have plenty in reserve. This logic helps you attain a much higher credit score. This is the same logic that suggests you should not close any credit card accounts, as they collectively will provide you a high credit limit, which is good for the score. Your credit card can be the single most important factor in improving and increasing your credit score. On the other hand it can also plummet your score to dark depths if you are not careful. Think smart and use your credit cards to your advantage. Here is some pointers on what to do and what not to do in order to achieve this reality. 1. No debts so far. Opting for a brand new credit card for the first time. This makes sense for your credit score. Making use of a credit card judiciously will help you improve your credit score. Just make sure you open your credit card with a respected and popular brand name. 2. Opening a new credit card account. When you already have a couple of credit cards, opening a brand new credit card account can cause a dip in scores. By all means obtain a new credit card if you are not planning to get into more debt, else think several times before opting for one. 3. Low credit limit. Keep a tab on the credit limit of your credit card. Open a credit card account with a company that will provide you with the highest credit limit possible. High credit limits, even if they are not used will add merit to your credit score and improve it. 4. Closing credit card accounts. Even if you do not use your credit cards, don’t rush to close them. Keep them as long as you can. If you must close them, then do that over a period of time. Closing too many too quickly will harm your credit score significantly. 5. Choosing the ideal credit card to close. The number of years you hold a credit card account has an impact on your credit scores. Hence, let your oldest credit card be, if you must close a card opt for the most recent cards and close them one at a time, maybe once a month over a period of time. 6. Rotate usage of multiple credit cards. It is a smart move if you utilise different credit cards for your various different expenses instead of constantly using only one credit card for most of your purchases. Make it a point to use each credit card you have once in six months. Some credit card companies might even close your account if they feel you don’t use the card at all. In such instances, it affects your credit score. To be on the safer side, try and use every card from time to time. 7. Bargain for a lower interest rate If you have never defaulted on a payment for a few years, make use of your good repayment track record and speak to the bank officials for a better bargain. Request them to lower your interest rate citing the good track record you hold with them. Keep following up with your bank from time to time and you may just get your wish! 8. Request for an increase in credit limit You may have purchased your most recent card because of the higher credit limit. If at a later date you wish to close some of your cards and you know it makes better sense to close the most recent card, you have a dilemma. The most recent card has the highest credit limit. The oldest card has the lowest credit limit. What do you do? In such instances, if you have a good repayment track record, approach the bank and negotiate for a higher credit limit especially since you have been their customer for quite a few years. Most banks will oblige and you can then proceed to close the most recent card if you absolutely must do so. 9. Keep a self imposed credit limit, which is much lower than the actual credit limit Never exceeding 40% of your credit limit has a very beneficial effect on your credit score. This shows your credit limit is high but you have not burnt it up and have plenty in reserve. This logic helps you attain a much higher credit score. This is the same logic that suggests you should not close any credit card accounts, as they collectively will provide you a high credit limit, which is good for the score. 10. Paying off credit card dues quickly will dramatically improve your credit score. Try not to encourage too much credit card debt. Be wise and pay the dues quickly and keep rotating your cards. Paying off dues will cause a spike in your credit score, which is highly favourable.   • Email to a friend • Article Search • View comments • Track comments • Manage your credit card! A credit card is a useful tool, when managed judiciously but a lurking danger if you mismanage it.  One of the first things you need to keep in mind, is read the term and conditions when you apply for a credit card. It could be a laborious process but something that has to be dealt with, to protect yourself from any rude surprises that might be in store for you in times like this. One hears stories of money being taken from the savings account of a person who has a credit card with that particular bank! Well, banks are allowed to do so, when a default occurs, the clause is covered in the terms and conditions. Banks also have an auto debit facility to claim a minimum payment on credit borrowed, if in case your account does not have enough funds, banks are allowed to levy a fine, which could be ridiculous amount that is nearly half the amount you borrowed! For eg. It’s not funny when a fine of Rs.400 is charged for a Rs.500 credit borrowed! Credit cards can be useful when you make a profit out of it! Now, how is that possible? Well, it all depends on the kind of card you purchase, its best to opt for a lifetime free credit card that does not have an annual fee attached. Also get a card that matches your lifestyle. If you shop a lot, see that your card offers a lot of discounts and cash back rewards for the all the shopping you do with a card. If your job allows you to make frequent trips, get a card that gives you several travel friendly schemes on eating out, hotel stays and airline ticket discounts. Though the whole point of having a credit card is to provide you with cashless convenience, it makes money sense to decide, when, how and why you should use it. Never get tangled in the web of debt, especially when it comes to credit cards. Though its an ideal resource to tap into, when you need to ramp up funds quickly, the interest rates charged on a credit card are much higher than even those charged on personal loans. Remember that cash withdrawals from an ATM with your credit card will be charged a processing fee of around 2% and an even higher rate of interest than your regular purchases on the card. Most credit cards do offer an EMI facility to pay any loan you take on your credit limit. It normally takes just one or two business days to obtain this loan and this can even be arranged over the phone with no documentation. However, the difference lies in the high interest rate charged, which can be as high as 30-42% as an annualized rate. The cards that offer a comparatively lower interest rate in the range of 22-26% most often do not have an EMI facility for repayments. Though credit cards seem like a good bet for short term fund requirements refrain from using it, unless you can make the credit card usage count for some kind of benefit. Using your credit card purchases for an interest free period is fine, however remember the bank can do away with interest free periods anytime it chooses to and also hike the interest rates, according to its free will. Hence, be wary of a credit card and use it sensibly.   • Email to a friend • Article Search • View comments • Track comments • Know your personal loan! The key to getting the best rate for a personal loan is by maintaining a clean credit history. Your credit history is recorded by the credit bureau (CIBIL) which in turn gives you a credit score. This is shared with banks. Banks will use this as the key parameter for determining the rate of interest on your loan and whether a loan should be provided to you in the first place or not. Good repayment track record will not only ensure quick approval but also lower rate of interest. When should one opt for a personal loan? By virtue of it being an unsecured loan, personal loans have a very high rate of interest attached to it. So one should consider taking a personal loan if and only if - You do not have an asset/security against which you can get a loan. For e.g. if you have a property which is not already a security for a home loan, you can get a loan against property - You have some visibility on your cash flows and are sure that you will be able to repay the EMIs in time. Else you are bound to enter into a debt trap. - There is an emergency and you need funds immediately. A personal loan can be taken because the processing time is much lesser on account of minimal documentation. Opt for personal loans only to meet your essential needs which cannot wait. It should be your last resort (before considering withdrawing cash on your credit card). Taking a personal loan for satisfying leisure needs can prove to be costly i.e. for gambling, buying a new car etc. What factors will determine your total loan cost? Interest rate is not the only cost associated to the product. Several charges can be levied which will affect the overall cost of the loan. Hence, rate of interest should not be the only parameter considered while comparing this product across banks. Some of the charges levied include - Processing Fee: This is charged from the borrower to process the loan application. It is typically between 1% and 2 % of the loan amount. Some banks charge a flat fee. This fee is to be paid up front with the loan application and supporting documents. - Pre-payment Fee: If the EMIs are paid before the tenure, banks will normally charge the borrowers a pre-payment fee which will be in the range of 2% and 5% of the outstanding loan amount. Usually, pre-payment is permitted only after a certain period of the loan disbursal. - Late payment penalties: If there is a delay in paying off the monthly EMIs, banks will levy a late payment fee with the EMI. It usually is in the range of 2% and 3%. - Cheque bounce charges: If you have given post dated cheques and it is not honoured by your bank on account of insufficient funds, you will be charged a penalty for cheque bouncing. Banks charge anywhere between Rs. 250 and Rs. 500 for the same. - Documentation charges: These are the charges for verifying the borrower’s documents to processing the loan application. Most banks employ a third party vendor to do the same. Charges are anywhere between Rs. 500 and Rs. 1,000. How to select the best personal loan offer? For selection of a personal loan that will offer you maximum benefits, consider the following factors - Rate of interest: This will differ from bank to bank depending on their assessment of your risk profile. Factor in your total interest outgo while comparing the total cost of the loan offer between banks. - Other charges: As is stated above, there are several charges levied by the bank which will have an impact on the total cost for you. Hence, let not interest rate be the only factor you consider from the cost angle. Take the total cost into consideration. - Amount of loan: Check if the bank is providing you a loan sufficient enough to meet your financial needs. - Tenure and EMIs: If it is a shorter duration loan, the EMIs will be higher and vice versa. So if you feel you will not have sufficient funds to pay off high EMIs initially, then this factor will be important too. On the other hand a shorter tenure might help you close the loan early at a lesser interest outgo. So take a stand, depending on your monthly budget. Take all the above parameters into consideration before selecting the bank from which you will take the personal loan How to ensure that you get the best possible rate on a personal loan? - Keep a tab on your credit score: The key to getting the best rate for a personal loan is by maintaining a clean credit history. Your credit history is recorded by the credit bureau (CIBIL) which in turn gives you a credit score. This is shared with banks. Banks will use this as the key parameter for determining the rate of interest on your loan and whether a loan should be provided to you in the first place or not. Good repayment track record will not only ensure quick approval but also lower rate of interest. - Use your existing relationship with the bank: Banks tend to extend relationship privileges to existing customers in order to retain customer loyalty. So they may waive off or reduce the processing fee, documentation charges and may offer you a better interest rate than that offered to a non banking customers. If you’re stuck with a personal loan and are not able to meet the EMI commitments, what should you do? Try to convert the personal loan which is an unsecured loan to a secured loan against assets such as a house, car, mutual funds, RBI bonds, gold, bank FDs, life insurance policy, shares and debentures by asking the bank to restructure your loan. Make sure that the EMIs are reduced for an amount comfortable for you to make payments at an interest rate of a secured loan. If you feel that you’re not getting an advantage enough for converting the personal loan into a secured loan, you can separately pledge the assets you have and obtain a loan against them and then with that loan amount, pay-off your personal loan.   • Email to a friend • Article Search • View comments • Track comments • Source: BankBazaar.com