Everybody yearns for contentment. A life with all needs in Maslow’s hierarchy fulfilled – right from physiological to self-actualisation. Happiness may come from planting a tree or building a safe house for your family.What complicates the equation is our eagerness to secure happiness. To balance the equation between happiness and time, we often introduce constants. One such constant is capital. The relationship that capital often shares with happiness and time is a complex one. To make things simple, let’s just take situations where increase in capital reduces time required to achieve happiness – building a house, throwing a big party, buying a new car, better education, and better healthcare to name a few. Everybody wants financial independence. However, there may be situations where you may need a helping hand from a financial institution or a lender to achieve happiness – namely, loans.
Another View of the Situation
Let’s look at this situation from the point of view of a financial institution (for convenience, let’s say a bank), now. Banks have a lot of liquidity which they lend to individuals and organisations at an interest rate for a certain time period. This was quite a simple process in the pre sub-prime era. However, increasing number of credit card frauds, organisations going under and other bad debts have meant that the rules for lending have become stricter.
So How do You Know If You’ll Get a Loan
While situations and parameters (sum required, your salary, period of borrowing etc.) may differ significantly, your credit rating (given by the Credit Information Bureau, also known as CIBIL) is an important parameter that lenders consider at the time of sanctioning loans. CIBIL credit rating is a 900 point scale that checks your credit history to determine if you can repay the loan amount within the stipulated time period. A high score on your report card translates to high probability of loan approval. As a ballpark figure, a score of 770 or more translates to high credit worthiness.
5 Ways to Improve Your Credit Rating
1: Clear All Dues in Time.
Whenever you make a purchase on credit, always make sure to repay the amount within the stipulated time frame – this also includes the grocery purchase you made last weekend using your credit card. Also, make sure you clear all outstanding amount in case you plan to close a bank account.
2: Always Remember – All Good Things Come to Those Who Wait.
Unfortunately,the complex correlation between time and capital is considered by lenders as well. You are therefore advised to not put yourself under unwanted financial stress by taking too many loans at one go. Repay your outstanding before applying for a new loan.
3. Mix & Match is the Mantra
Ensure a healthy mix of secured and unsecured loans. We understand that it’s not always pleasant to borrow against a collateral.However, too many unsecured loans reflect badly on your credit score. Besides, secured loans in most cases also attract a smaller interest.
4. Don’t keep Switching Accounts
The average age of your credit accounts plays an important role in improving your credit worthiness. Ensure a respectable average age of your credit accounts.
5. Maintain a Healthy Credit Utilisation Ratio
Credit utilisation ratio is the percentage of outstanding balance on all your credit cards to your total credit limit (sum of limits on all cards). This doesn’t just translate to judicious use of cards, it also means that if you spend Rs. 50,000 in a month with 5 cards (at a total credit limit of Rs. 2, 50,000), and close accounts with 2 lenders – thus bringing your limit down to Rs.1, 50,000 – you will need to bring down your spending to Rs. 30,000 to maintain the same credit utilisation ratio.
Hence, to know if you are in the green zone for loan approvals, be prudent in your financial decisions.