The interest rate offered to individual customers is generally based on the following factors

·        Loan Amount – Higher the loan amount lower would be the interest.

·        Female Ownership – If there is female ownership an additional discount is offered.

·        Employment Status – Self-employed people will have higher rate of interest.

Recently, banks have introduced one more factor and started offering differential rates on the basis of credit worthiness which is measured by the Cibil score.

Higher the credit score better would be the rates offered.

This is a welcome move and can induce people to maintain high credit worthiness.  

Your credit score depends on the following

1) Promptness in repayment - How promptly and efficiently you have been servicing your existing credit cards and loans. Banks and credit card companies would be sending your repayment data to credit rating agencies on a monthly or quarterly basis. They would in turn serve as the repository of your credit transactions and score you on the basis of the repayment track record.

2) Inactivity – Complete or Temporary - If you have never availed a credit card or loan the rating agencies will give you a score of -1 indicating no records found. Some Bank/HFC’s will still consider this but some may not be ready to pass on the rate benefits in such a scenario. Similarly, if you have not been using any credit card for a long time and do not have any existing loans then for some strange reasons the credit score can remain subdued or rather not improve. In absence of any improvement in your score, it can continue to remain below the desired threshold score set by some of the banks.

3) Delay in Commencement of EMI’s by Bank/HFC’s – If your Bank/HFC delays the start of your EMI’s or Pre EMI’s for personal/auto/home loans then the report which goes to the credit agencies will capture this delay. Your score can come down due to the fault of the Bank/HFC’s. Please ensure your EMI’s for all kinds of loan commences on time.

A) Key Points on Loan Taken

Loan Default – God Bless You! Banks & HFC’s will shy away from giving you any kind of loan if the credit report states that you defaulted on any loan taken.

Loan Settlement – Same Result & God Bless you again! We just said no to a person with excellent salary figures, good deposits with the bank but had settled a home loan earlier in his career as per the credit report.

The Bottomline – Beg, borrow (from anywhere else) or steal but you shall not settle or default on any loan taken.

B) Key Points on Credit Card Taken

Credit Card Default – Any kind of default, credit card or loan, will affect your score negatively and banks will shy away from lending.

Credit Card Settlement – This also affects your score negatively but can still be considered as the reason for this may not be your fault, necessarily. It could be due to the over ambitious credit card company

Credit Card Overdue (After making full payment) – A very common problem that we encounter. You would have made the complete payment outstanding on a given date and would have decided to close/surrender the card thereafter.

On the day you make the complete outstanding payment to the credit card company you would retire to bed happy thinking that you don’t have any more outstanding on the Credit Card. Oh Man! …you have got it all wrong. Remember the famous “Hand of God” goal scored by the legendary footballer Late Diego Maradona in the world cup of 1986. On similar lines, there will be an invisible residual balance left in your credit card (“Balance of God”) which was unknown to you and surprisingly unknown to your credit card company also on the day of final payment. Let’s say a mere Rs 100.

They will then compound this Rs 100 at an astonishing rate and in 6 months’ time it could become Rs 500 with all late payment charges and the interest on those charges

Seeing this astonishing figure, you may be tempted to reach a settlement instead of paying it in full. Most banks, therefore, may be fine with credit card settlement issues provided the relevant documents pertaining to that are furnished and your overall profile is found satisfactory.

The Bottomline: If you make the complete payment towards the credit card and stop using it, please recheck the balance after a week/month/quarter. This is to ensure you are not caught off guard in case the credit card company were to miraculously score a goal against you using the “Hand of God” or should we say the “Balance of God”.