Credit is a necessary evil. Evil because it implies you may not have the necessary funds to cover the cost due to which you need the credit in the first place. But credit can also have a positive impact on your life. Provided you maintain a healthy credit history, credit rating agencies in India will record every timely payment that you make and you will have a very favourable credit history and credit score. How do these help, you may ask? When you apply for a loan for emergencies or to buy a home, for example, or if you have unexpected expenses that you hadn’t planned to save for, or when you apply for a job in a company that does a very thorough background check of its potential employees, your favourable credit history will guarantee that you never have to face a rejection on these grounds from any of these institutions. Credit score is a compulsory metric that all financial institutions will consider before they give you any kind of loan.
There are various types of credits available in the market. Are all of them considered in the same manner by the banks? Let’s have a look at them:
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Personal loans – One of the most important types of loans, these do not require a security or collateral and hence have high interest rates. If you make your payments on time, however, a personal loan can have a very good impact on your credit score. Most banks, however, would think twice before granting this loan. After all, they don’t have any secured means of recovering their monies when it comes to personal loans.
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Home loans – One of the most favoured types of credits issued by banks, this loan has collateral – the house for which the loan is taken. Even home improvement loans are considered “safe bets” as they are used to improve the value of an asset which will only fetch a better price. Home loans are steady credits that people take very seriously else they will end up homeless, and thus have better interest rates than personal loans.
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Auto loans – This type of loan elicits mixed feelings from bankers. They do have collateral against which the loan is issued but the asset, the vehicle, depreciates in values unlike real estate that always appreciates.
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Business loans – These loans are viewed in a positive manner as business loans are usually taken to expand business, and thus indicate a prospering company. Banks may or may not require collateral for this type of loan depending on quantum of the loan and the bank’s eligibility criteria.
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Educational loans – Again a positive type of loan, these indicate that a person is willing to improve him/herself and become more qualified which usually translates into better earning capacity. Most banks do require a guarantee of collateral for this loan type too.
At the end of the day, no matter what kind of loan you have, you must make their payments on time and try to have the loan for its full duration so you have a longer and better impact on your credit score. Before applying for a loan, though, keep the following things in mind:
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Before you decide to make large purchases or incur heavy costs, make sure you have sufficient savings. Should your credit plans fail, you will at least be able to rely on your savings to survive and to pay off your debts without getting into a “bank settlement”.
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Make a budget and try to stick to it. Compare your incomes and expenses. Spend credit on necessary things and not on reasonable personal cravings.
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Use debit cards more than credit cards to avoid having a huge loan to pay off and to curb your spending urges.
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Have an investment plan that will help you with your taxes as well as give you an extra source of income in terms of profits and interest accrued.
A good balance of credit and debit will go a long way in favourably impacting your credit scores and to give you the confidence that you can deal with any unexpected problems in life with ease. So get started with your planning!
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