What are the various factors affecting the credit score?

many factors are held responsible for affecting an individual's credit score. these factors are -

• repayment history

making consistent repayments on your loan can do miracles for your credit score but being inconsistent or irregular while making these repayments can affect your credit score adversely. hence, "how you repay" is considered an important factor.

• the payment obligations

having too many debt obligations or reaching the maximum limit of credit cards with dues pending for several months, can affect your credit score. therefore, make sure to be consistent and disciplined with the clearance of your dues.

• credit history length

the more the length of your credit history, the more is your credit score. to have a positive credit history, consider making regular repayments.

• credit mix

credit mix is an assortment of different credit forms and is addressed as a comprehensive report that signifies the various forms of credit that a borrower has and how efficiently he has been handling them all. the lenders use this report to decide whether your credit application should receive approval or not based on your repayment behaviour. depending on the credit lines that you have chosen, your credit score can get affected. and if the report is healthy, the lenders will feel comfortable in lending and vice-versa.

• application for a new credit

this is a common mistake that most of the potential borrowers do. to have access to more credit, they apply for new credit within a short period from applying for the previous credit. this activity can result in affecting your credit score as it may show you as "credit hungry" to the lenders and bureaus. depending on the above 5 factors, your credit score gets calculated by the four credit bureaus (cibil, equifax, experian, crif high mark) functioning in india. an individual's credit score will slightly differ from bureau to bureau as each credit bureaus practice a different mechanism to calculate the credit score.

What credit score is considered the "best"?

The credit score that makes the borrower eligible for any loan type and is considered the "best" is a credit score of 750 or above. with such a credit score, you not only get eligible for every loan type but can also avail the loan at better terms.

What credit score is considered the "lowest"?

The credit score that is considered the "lowest" is the credit score of 300. with this credit score, the banks and nbfcs will not be willing to lend you. so, you must try to follow the methods that can help in improving your credit score. the next section talks about these steps.

How can credit score be improved?

Improving credit score is a concern to many. the process of improving your credit score is time-consuming but not impossible. even if you have a bad credit score, considering a few methods can successfully improve it with time. these methods are as follows -

• Pay the previous debts

you must be able to pay off the debts completely that were partially paid by you previously. having an appearance of a "settled" or "written off" account in your credit profile might lose the lender's interest in lending your credit as it represents that you were inconsistent and dishonest towards making the repayments. hence, make sure to settle a debt by paying off it in full to avoid the existence of "settled" or "written off" account in your credit profile.

• Apply for short term loans

making loan repayments on regular basis adds to your credit score. the best and the most convenient way to make it happen is by applying for a short-term loan and performing regular repayments on it. although, the rate of interest that is levied on this loan type is comparatively higher but is amongst the quickest way to improve one's credit score. in case you are someone who has a credit score of 700 and wants to take it to 800, this practice will work extremely well in your favour. however, if you are having a credit score 650 or lesser, your chances of availing this loan will significantly drop since it is an unsecured loan.

• Secured credit

when you go for a secured credit such as loan against property or secured credit cards, the banks are introduced to negligible risk as the borrower has to provide collateral to the banks for the approval of the loan. having a poor credit score drastically reduces your chances to get approved for an unsecured loan. in such a situation, applying for a secured credit may be regarded as the best option for you if you are in the dire need of funds. in case you opt for this method, you are required to make timely repayments of your credit card bills or emis to have a favourable impact on your credit score.

• Alternate mode of credit

despite traditional credit lenders, many peer-to-peer (p2p) lenders are offering loans or line of credit to the borrowers. p2p lend you short-term loans, depending on your monthly salary. even if you have a bad credit score, they'll still lend you credit but somewhat at a higher rate of interest. you must be very regular with paying off the credit that has been lent to you by p2p to improve your credit score. when you perform any of these methods intending to improve your credit score, you must be aware of the fact that it'll take a few days for the changes in your credit score to reflect in your credit report as the lender will require some time to report the changes to the credit bureau. hence, in case the changes in your credit score have not been updated in your credit report, wait for 15 more days before you get into your credit score.

How to avail credit with bad credit score and no guarantor?

Various options available to the borrowers with a bad credit score

• Secured Credit

Applying for a secured credit is the perfect option for anyone having a bad credit score by providing collateral for gold loan, loan against property and secured credit cards. In these types of loans and credit cards, the risk associated with the banks is minimal or negligible, therefore, known as secure credit. All the other loans except for the home loans or vehicle loans, are quite easy and possible to get. The banks will get lenient while levying the interest on the loans as the risk associated for the banks is extremely less. You can easily avail a loan of 60% to 70% of the collateral that you've provided. Following the same principle, you can get approved for the secured credit cards as well and your credit limit will be 60% to 70% of the collateral provided. The secured credit cards will have an advantage over the unsecured credit cards. The interest charged on secured credit cards is lesser than the interest charged on unsecured credit cards. Generally, the secured credit cards are approved against the fixed deposits.

• Unsecured Credit

If you are wanting to request for secured loans i.e, without pledging any collateral, you must be earning an impressive income from a reputed company.

The biggest struggle that you've to face with unsecured credit is that you will be introduced to unappealing interest rates. Since the banks find it risky to lend you an unsecured loan, they'll charge you a higher rate of interest. Sometimes, even the loan amount gets reduced by the banks. For instance, the loan amount for a home loan will get reduced to 65% to 70% with a bad credit score, that normally is around 80% to 90%.

The maturity period of your loan will be shorter as the banks will be willing to fetch the loan as soon as possible.

• Alternate Mode of Lending

A borrower with bad credit score has access to three other options excepting the banks for requesting a credit to.

• NBFC

Some NBFCs grant loans to the borrowers having a bad credit score by charging a bit higher rate of interest from them.

• Peer-to-Peer (P2P)

P2P is the latest online shift that provides loans to the people with bad credit score for up to a maximum limit of 5 Lacs and the tenure of these loans ranges from 1 to 3 years.

• App-based Lending

With the advancing of the digital world, the credit world is experiencing an emergence of various start-ups that grant short-terms loans to the borrowers, depending on their monthly salary. These loans have higher interest rates, that may sound unpleasant to many borrowers. However, it is a wise decision to make when you have a bad credit score and left with no other choice to consider.

Top 5 successful ways to elevate your credit score

The following are the top 5 proven ways that will help in elevating your credit score successfully.

• Consistent Repayment History

The most common mistake that we all do is making delays in the repayments on our loan or credit. So, the very first step towards the improvement of credit score is to make timely repayments in full as your repayment history is responsible for forming up to 30% of your credit score. Hence, work for a clear repayment record from TODAY despite having the defaults previously. Paying off the repayments on time will result in an instant favourable impact on your credit score.

• Get a Copy of Your Credit Report

Since your credit report may show some errors, it is important to get a copy of your credit report for identifying the errors and getting them resolved as soon as possible. At times, due to these errors, a loan that has been previously repaid by you in full can still be addressed as "outstanding" in your credit report. Raise a dispute and get the errors resolved to prevent dropping off your credit score and have a positive impact on your credit score instantly. Moreover, your credit score can have a substantial decline due to an incorrect address or mistaken identity. For instance, shifting to an address that was previously owned by a "defaulter" may turn out to be a potential threat to your credit score. Consider checking your credit report frequently to look for any erroneous entries that may be a sign of identity theft. Make sure to resolve these issues to improve your credit score.

• Less than 50% Credit Spend

Reaching the maximum limit of your credit card may not work in your favour. Therefore, it is advised to keep the spend of your credit limit below 50% for each month. For instance, with a credit limit of Rs. 1 lac, try to keep your monthly expenses lesser than Rs. 50,000. If you spend more than 50%, it will indicate your irrational behaviour towards your monthly expenditures. Consequently, your credit score will drop. If you continue to plan out your monthly expenses within 50% of your credit limit, your credit score will increase instantly.

• Avoid Making Multiple Applications

Most of the people are in a misconception that making multiple applications with various lenders can drastically increase their chances of approval for a loan or credit, but that is what the case is. When you apply for a new loan or credit, a hard enquiry is made by the potential lenders. And, more hard enquires within a short span may lead to a decrease in your credit score as it may represent you as "credit hungry" in front of the lenders.

• Avoid applying with a Bad Credit Score

You must avoid applying for a loan or a credit card in case you have a bad credit score as your application will be rejected. And, every time your application gets rejected, your credit score will be impacted negatively. So, make a wise decision by applying for a loan or credit card only when you are creditworthy.

What are the common mistakes that can affect your credit score?

Most of the people remain incognizant to the fact that how indispensable it is to have a good credit score until their loan application doesn't get rejected after applying. In this section, we have tried to cover all the common mistakes that may be the reasons for your bad credit score.

• Not being regular in paying your EMIs or instalments.
• Having a steady history of delayed credit card repayments.
• Multiple credit applications with multiple lenders within a short span.
• Being close to or crossing the maximum limit of your credit card.
Make sure to increase the value of your credit score to 700 and more to get your credit application accepted by the lenders as its rejection might drop your credit score further.

How to get eligible for personal loan with bad credit score?

A personal loan is nothing but your unsecured loan. A personal loan can be used for different purposes, depending on the requirement of the borrowers. You can get approved for a personal loan without the need of any collateral or guarantor. Since, there's no collateral or guarantor, the risk associated for the banks is high, therefore, the banks are extremely strict regarding the approval of the personal loan and if your application gets approved, you will be granted the loan at a higher rate of interest.

Your credit score is exceptionally important as that's the first thing in your credit report that catches the lender's attention while approving or sanctioning your loan application.

Credit score and its importance

Eligibility of business loan

Any individual operating a legitimate business while having a good turnover becomes eligible for getting approval for a business loan. The criteria to validate and authenticate an individual's business varies from bank to bank. Following are some of the parameters that are taken into consideration -

In case your credit report acknowledges multiple missed repayments or delayed repayments, you will experience a low credit score. According to the banks, an ideal borrower is the one who's having a credit score of 750 or more. Any score below that will result in many disadvantages for the borrowers. These disadvantages are -

• The nature of the business - Sole Proprietorship, Partnership, Private Limited or Public Limited.
• The turnover produced by the business in a specific period.
• Profit earned by the business.
• The cash flow status of the business.
• The record of the past performance of the business.

After the complete evaluation of the above factors, the decision regarding the grant of the loan is taken by the banks.

For what purpose are business loans taken?

The purpose of taking business loans may differ from business to business. Let us go in detail about 6 such purposes.

• Commencing a New Business

You all might be acknowledging many new start-ups making it into the markets. And commencing a new business is itself a huge expense. Therefore, an individual (s) may borrow a business loan to commence a new business. Now, the amount of loan may vary depending on the purpose for which the loan is being taken by the individual (s). It may be for purchasing a piece of land or leasing office space or raising funds for regular trading operations (or working capital). Depending on the credit score or assets possessed by the individual (s), the loan will be granted.

• Expansion

Once you have set up your business and it is experiencing a decent growth rate, the next step is the expansion of the business. The expansion of your business can be done by purchasing a piece of land or leasing or renting office space to enable more business operations and to add more talent to your existing staff by recruiting more employees. A business relying on its growth projections can proceed with expanding operations more than once.

• Purchase of Equipment

This is an era of technology. Therefore, it becomes important for businesses to upgrade their existing equipment according to new technological shifts before the pre-set expiry date of the in-use technology. The business loan can also be taken for buying or leasing new equipment that will ensure more production and business operations to increase profitability.

Many businesses might get confused between buying the equipment or leasing the equipment. The best way to avoid any kind of confusion is to perform a cost-profit analysis to determine whether buying or leasing is good for your business. However, buying equipment comes with an advantage. You can claim the depreciation on the bought equipment every year apart from the tax exemptions of the first year.

• Inventory Purchase

Often, the small businesses would need immediate funds for the purchase of inventory or the goods that are required at every stage of production. Now, imagine a situation where the demand for your product increased drastically in the market and the business doesn't have enough funds to acquire the raw materials to meet the consumer's demand for the finished good. In such a situation, many individuals and the entrepreneurs apply for the loans to purchase the inventory to enable the production of the high in-demand product.

• Financing Working Capital Requirements

The importance of working capital in the success of a business's day-to-day operations is known to everyone. Most of the times, small businesses or recently-commenced businesses do not have enough funds to meet their business's working capital requirements. In such a situation, it is ideal for them to request for short-term business loans until their own assets earn them enough revenues for the successful operation of daily activities.

• Improvement of Credit History

A business must have an impressive credit history to avail of larger loans. With this intention of improving the credit history, an individual or the proprietors obtain short-term loans and make regular and timely repayments on them to improve the credit history.

How to improve and get personal loans with bad credit score?

A borrower must have a good credit score to get approved for personal loans or credit cards. However, having a bad credit score makes it quite difficult to get either of them. The situation worsens when you are left with only one way by which your credit score can be improved and that one way is, paying off your dues consistently and honestly. Now, you must be thinking that there's not even a single way to escape from this vicious cycle. But, hold on! That's not the case eventually. The next section talks about personal loan options for the loan or credit defaulters.

What are the personal loan options for defaulters?

The best and the most successful option by which borrowers with a bad credit score can avail a loan or a credit card at a better deal is by pledging collateral against the loan or credit card that has to be taken. With they provide the banks with collateral, they can negotiate with the banks regarding the interest rates. These loans are termed as "secured loans".

However, if you are willing to apply for unsecured loans i.e. without pledging any collateral, you must be earning an impressive income from a reputed company. Being an employee in a reputed company with an expensive salary for a minimum of 2 years will make you eligible for the loan or credit card.

The biggest struggle that you've to face with unsecured credit is that you will be introduced to unappealing interest rates. Since the banks find it risky to lend you an unsecured loan, they'll charge you a higher rate of interest. Sometimes, even the loan amount gets reduced by the banks. For instance, the loan amount for a home loan will get reduced to 65% to 70% with a bad credit score, that normally is around 80% to 90%.

The maturity period of your loan will be short as the banks will be willing to fetch the loan as soon as possible.

Apart from the banks, the borrowers with a bad credit score can try applying for a loan or credit card with the alternate modes of credit.

• NBFC

Some NBFCs grant loans to the borrowers having a bad credit score by charging a bit higher rate of interest from them.

• Peer-to-Peer (P2P)

P2P is the latest online shift that provides loans to the people with bad credit score for up to a maximum limit of 5 Lacs and the tenure of these loans ranges from 1 to 3 years.

What can lead to improvement in your credit score faster?

• Close the Previous Credit Accounts

If your credit report addresses any dues or the statements of "settled" or "written-off" against your previously taken credit accounts, you must consider paying them back as quickly as possible and acquire the statement of "closed" against credit accounts. By doing so, you will be able to improve your credit score faster.

• Score of Building Credit

The introduction of score building credit by many lenders has helped the people with no borrowing history i.e., the individuals new to "credit" to begin with their credit score account. The credit products that score building credit offer are short-term and don't carry any risk for the lender. This method can be considered as an excellent way of gaining the credit score and becoming eligible to request for credit with a higher amount at better terms.

• Secured Credit

A borrower can also apply for a secured credit, where he or she has to provide an asset that will serve as collateral to the lenders to obtain the desired credit product. For instance, a borrower can request for a secured credit card where he or she can pledge collateral in terms of a Fixed Deposit of Rs. 1,00,000. By performing this, the borrower gets introduced to two main advantages. Let us go through them one by one -

• Interest is paid by the bank on the fixed deposit.
• By obtaining a secured credit card, the borrower will be able to avail all the benefits at a lower rate of interest, which is not possible without pledging collateral.

Remember, the limit of your credit card would be Rs. 60,000 to Rs. 70,000 because the issuers of the card only permit 60% to 70% of the collateral pledged as the credit card limit. However, the overall advantage that a borrower receives from a secured credit card is higher than the unsecured credit card.

How to get loan when commencing a new business?

Business credit score or company credit report

A company credit report is being used to analyse the financial standing of a company or an organisation. The following details are included in it -

• The registration number of the business or its registration details.
• An out-to-out profile of the company that includes name, DIN number, contact details, etc.
• A comprehensive credit history providing information regarding current loans, previous applications, total credit, default, etc.
• The complete repayment history that informs whether the company has ever been a guarantor for a loan.

How to choose a loan?

How to choose a loan?

Secured loans are defined as the loans where the individual (s) has to pledge collateral in the form of property or gold to avail the loan for commencing a new business. On the other hand, if an established company is applying for a loan for some purpose, it can provide any of its assets as collateral to avail the loan. Acquiring loans at good terms by pledging collateral is regarded as the best way for the individuals or company with a bad credit score.

• Identify the requirement of your business.
• Whether the needs and decisions of your business are strategic or tactical.
• The amount of the loan.
• Compare the rate of interest.
• The processing feel that has to be paid by you.
• The prepayment charges on the loan.

In case you are going to pay off the loan after utilising it for complete tenure, look for a loan with the lowest rate of interest and processing fee.

In case you are planning to pay off the loan before the ending of the tenure, compare the various loan options depending on their prepayment charges.

How to get secured loans with a bad credit score?

Secured loans are defined as the loans where the individual (s) has to pledge collateral in the form of property or gold to avail the loan for commencing a new business. On the other hand, if an established company is applying for a loan for some purpose, it can provide any of its assets as collateral to avail the loan. Acquiring loans at good terms by pledging collateral is regarded as the best way for the individuals or company with a bad credit score.

• Identify the requirement of your business.
• Whether the needs and decisions of your business are strategic or tactical.
• The amount of the loan.
• Compare the rate of interest.
• The processing feel that has to be paid by you.
• The prepayment charges on the loan.

In case you are going to pay off the loan after utilising it for complete tenure, look for a loan with the lowest rate of interest and processing fee.

In case you are planning to pay off the loan before the ending of the tenure, compare the various loan options depending on their prepayment charges.

How to get unsecured business loans with a bad credit score?

• NBFCs

In case you do not want to pledge a collateral against a loan, many banks and NBFCs offer you unsecured loans. Unsecured loans are the loans where you do not have to pledge collateral to avail the loan. Although it is quite hard for people with a bad credit score to get approval for an unsecured loan, it can still happen but the banks will charge a higher rate of interest. Often, the application of an individual (s) with a bad credit score gets rejected by the banks as they do not regard you as "credit-worthy".

In such a situation when banks reject your application for an unsecured loan, many Non-Banking Financial Companies (NBFCs) evaluate your creditworthiness with the help of a combination of data and technology for loan approval. NBFCs have come up with many relaxed and flexible policies to grant a loan to the individual(s) with a bad credit score but the interest rate is likely to be higher on these loans.

• Online Lenders

The online world has made our lives easier than ever including the loan acquirement for the individual (s) with a bad credit score.

Formerly, your inability to pay off your loans or credit card bills might have negatively impacted your credit score. Now, this does not mean that you can't acquire a loan. To help the individual (s) with a bad credit score, many online lenders have come up to provide them with a loan or credit card to meet their needs for urgent funds. These online lenders have a different process than the traditional banking system to analyse your creditworthiness. The process is quite faster and you get granted with the desired loan without waiting for long.

• Approach Your Current Lender

You can also succeed in acquiring an unsecured loan for your business by directly approaching your local bank from where you have acquired your existing loan or credit card. Speak to the bank manager regarding your situation and the areas where you went wrong in the past. Following that, talk about your current business operations and appeal for an unsecured loan for your business at a low rate of rate. By performing this, you may get an unsecured business loan without putting in much effort if, during the negotiation, you can present a promising repaying ability.

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How to obtain home loan with a bad credit score?

To help the individual (s) in buying their dream-house, a home loan is provided. Although a home loan is a secured loan as the home itself serves as collateral, the banks still focus on the borrowers having a good credit score since the home loan has a longer tenure, causing the banks to invest for a longer period. In case the borrower fails to pay off the loan, the bank has to follow a tedious and expensive procedure of seizing and auctioning the possessions.

To avoid such a scenario, the banks approve the home loans to individuals with an impressive credit score. But that doesn't mean that the individuals with a bad credit score can not get approval for a home loan. Even if they have a bad credit score, they can still get approval for the home loan if their underwriting process satisfies the bankers.

The underwriter will analyse the risk that the lender has to bear on granting you with the home loan. The following factors are taken into consideration by the underwriter for this evaluation -

• Salary - The underwriter reviews your salary to have the information regarding -

All the above factors are taken into consideration by the underwriter for the determination of your creditworthiness

• Other Debts and Liabilities

By assessing your credit score and credit report, the underwriter will have a look at your other debts and liabilities. Having gone through your credit report, the underwriter will be able to get the detailed information regarding your repayment behaviour on the previous or existing debts. In case any default is found in your repayment history, it can cause a hindrance in the approval of your loan application.

• Marital Status

The marital status of the borrower, whether the borrower has children and whether the borrower's spouse is working and his or her job will be scrutinized in case the spouse is a joint applicant.

• Additional Verifications

Firstly, the underwriter will conduct an assessment to verify the information provided by you in your loan application form. To cross-check all the provided information, the underwriter will connect to your workplace to ensure whether you really work there, your post and the salary that you receive, if possible. The details like your residential address and phone number will also be examined.

• Home Appraisal

This is the final stage of the underwriting process and is termed as "home appraisal" or "property appraisal". In this stage, the underwriter evaluates the home that the borrower is going to purchase. He will inspect every minute detail of the property documentation, the history of the property to ensure that no other person has an assertion on the property and the value of the property by comparing it with other such properties. This entire process is conducted to prevent the banks from getting into any trouble and to make sure that nothing has been kept a secret by the borrower.

In case, these factors are in your favour, there are chances of you getting your loan approved by the banks even when you are having a bad credit score since these factors tell that you are capable of paying off the loan.

Home loan with a bad credit score

• Improvement in Credit Score

In case you have acquired the status of "settled" or "written-off" on any of your loan or credit card account, it will suggest the lenders that you were unable to pay off your debts completely. The presence of "settled" or "written-off" on your credit report can cause more harm to your credit score than the missed repayments. Therefore, try to remove such accounts and replace them with a "closed" account by paying off the dues. By performing this, your credit score will experience an improvement. And, having an impressive credit score will help you in obtaining a loan at a lower rate of interest since a credit score is inversely proportional to the rate of interest.

• Hunt for Alternate Sources

If you have a bad credit score and in an immediate need of funds, you can hunt for alternate sources that will provide you with a loan or a credit card based on criteria other than the credit score. One such alternate source is NBFCs or Non-Banking Financial Institutions that will look for other factors instead of your credit to approve your loan application. However, the rate of interest charged by NBFCs would be comparatively higher.

• Apply for Lower Loan to Value (LTV)

When you apply for a loan amount with the bank, based on the property value, it is termed as LTV or Loan to Value. According to the policy framed by RBI, banks should avoid providing the borrowers with the loans above 80% to 85% of the property. However, in some cases, the borrower can get granted with a loan of 90% to 95% of the property value, depending on the limits and benchmarks of the bank from which loan has to be taken.

• Lower FOIR

The Fixed Obligations To Income Ratio (or FOIR) is used for the calculation of all the fixed obligations that a borrower has to meet in a month, inclusive of the EMIs of the home loan as a ratio to the borrower's monthly salary. This ratio gets froze and the amount of loan is restricted by the banks in a way that the amount of EMI is lower than the recommended or stipulated amount of the bank, making you eligible for a lower amount of loan.

• Joint Application or Get References

To understand the concept of a joint application, let us consider an example. Mohit is married to Meena. Meena has a credit card and she has been paying the credit card bills regularly, due to which she has an impressive credit score. Now, since Mohit's wife Meena, has a good credit score, Mohit can apply for a joint application for a home loan with his wife being a "co-borrower" or "co-applicant". In this way, the income of Mohit, as well as Meena together, will be taken into consideration. As Meena has a good credit score, the home loan can be availed at better terms.

The other way to avail a home loan despite having a bad credit score is, to get references by someone who has a reputed personality and can vouch for you on your behalf.

• Joint Application or Get References

A home loan is a form of secured loan since the house purchased will serve as the collateral for the loan. In case of the bad credit score, the borrower can pledge interim security such as Fixed Deposits, Gold or other owned property.

In what way can credit score affect my application for education loan?

Banks quest for companies or the individual(s) that can successfully pay off the due consistently and on time. To know if this requirement can be met, the banks will examine your or your company's (if you are running a business) credit report and credit score. In short, banks favour reliable borrowers.

Just like the other loans, the application for education loan also gets affected based on the credit score. An education loan is for the students those who want to further pursue their studies. Since they do not have a constant income based on which they can get a loan, the income, as well as the credit report of their parents, are considered while determining whether to approve their loan application or not.

The assessment of the credit report of student's parents is performed to know about the following things -

Depending on the above factors, the banks will decide whether to accept your application or to reject.

How to obtain education loan with a bad credit score?

We all know how important is it to be educated. Many good career opportunities come your way when you are well-educated. To build a secure future for their children, parents make every effort to provide the best education to them. However, as it is known that education has become quite expensive these days, therefore, many parents can not afford the fee. In such a situation, education loans can be taken by the parents or the children, where the parent acts as a "cosigner", pledging to pay off the loan on the child's behalf.

Since the student (for whom education loan is being taken) will not be having any credit score as he or she would have any borrowing history, the credit score of the student's parents is to be considered as they agreed to be the "cosigner". If the parents are having a low credit score, the approval of loan might get difficult.

According to recent studies, education loan is experiencing an increased number of defaults, which is giving rise to more frequent Non-Performing Assets (NPA) for the banks. The reason behind the increased number of defaults on education loans are as follows -

The above issues are the consequences of high-ticket fees in low-ranked colleges and the students getting placements in the companies offering a low salary. Moreover, the careers of the parents (who agreed to be the co-borrowers) are going to end soon due to which they would not be having a constant source of income, leading to their inability to repay for the loan. These factors have contributed to making the education loan approval process strict by the banks.

What if you fail to repay the home loan?

In case the borrower fails to repay the home loan, he or she will end up making a "default". The bank will not bother the borrower for the first month. However, if the borrower makes the default again for the second month, he or she will receive a reminder letter from the concerned bank regarding the paying off the dues. Only when the borrower makes the third default, the bank can enforce the right, “The Securitization and reconstruction of financial assets and Enforcement of Security Interest act, 2002” to put the home for auction.

Before putting the house for auction, the bank will forward a legal notice, asking the borrower to pay off the loan. If the borrower still does not respond positively, banks will forward another notice, specifying the amount that they have assessed for the borrower's home and when they are going put the home for auction, that will happen after 1 month of the notice.

By now we know that the bank provides 6 months to the borrower before putting the home for auction. In the meantime, the borrower can contact the officials of the bank to get the issue solved.

What are the various factors affecting your credit score?

Bad credit - what is it about?

The borrower's irresponsible behaviour towards managing his or her credit results in a bad credit history or credit score. This could happen due to any of the following factors -

Having a bad credit history and credit score puts the borrower (s) in the bad books of the lenders, that may result in the rejection of the loan application. Therefore, it is advised to show responsible behaviour towards the management of your credit by making timely and consistent repayments.

How to obtain a credit card when you have bad credit?

Despite having bad credit history and credit score, there are various options by which an individual can obtain a credit card. It can be done either by requesting a credit card online or visiting a close-by bank.

• Secured Credit Cards

An easy way to obtain a credit card when you have a bad credit history is to apply for the secured credit cards. Since these are secured credit cards, they are provided to you against the fixed deposits in your bank account. The limit of your secured credit card would be up to 80% of the fixed deposit.

Since the credit card is provided to you against the fixed deposit, banks do not reject your application as there will not be any associated risk for the banks. You would not be facing any problem if you continue to make regular payments of your credit card bill. In case you make a "default", the amount on which the default has been made will be deducted from your fixed deposit by the banks. Further, the default might impact your credit score.

• Alternative Lending

Due to the advancing of the online world, many online lenders are offering credit cards to the individual (s) with a poor credit history and credit score, that is becoming more apparent and prominent in the lending market. One such example of popular alternative lending is Peer-to-Peer (P2P) lending.

The alternative lending takes place through online platforms where the lenders use different criterion than the traditional banking institutions to grant credit cards to the individual (s) with no or bad credit history. To check whether the borrower is eligible for the credit card or not, the salary and social media profiles of the borrower are considered. Hence, when you have a contact income and social media profiles, you do not have to depend on your credit history and credit score to receive approval for the credit card application.

How can bad credit be improved?

No doubt, bad credit is a matter of concern to many. The process of improving your bad credit is time-consuming but not impossible. Even if you have a bad credit score, considering a few methods can successfully improve it with time. These methods are as follows -

• Pay the Previous Debts

You must be able to pay off the debts completely that were partially paid by you previously. Having an appearance of a "settled" or "written off" account in your credit profile might lose the lender's interest in lending your credit as it represents that you were inconsistent and dishonest towards making the repayments. Hence, make sure to settle a debt by paying off it in full to avoid the existence of "settled" or "written off" account in your credit profile.

• Less than 50% Credit Spend

Reaching the maximum limit of your credit card may not work in your favour. Therefore, it is advised to keep the spend of your credit limit below 50% for each month to achieve a lower credit utilisation ratio. For instance, with a credit limit of Rs. 1 lac, try to keep your monthly expenses lesser than Rs. 50,000. If you spend more than 50%, it will indicate your irrational behaviour towards your monthly expenditures.

Consequently, your credit utilisation ratio will increase and your credit score will drop. If you continue to plan out your monthly expenses within 50% of your credit limit, your credit score will increase instantly.

• Avoid Making Multiple Applications

Most of the people are in a misconception that making multiple applications with various lenders can drastically increase their chances of approval for a loan or credit, but that is what the case is. When you apply for a new loan or credit, a hard enquiry is made by the potential lenders. And, more hard enquires within a short span may lead to a decrease in your credit score as it may represent you as "credit hungry" in front of the lenders.

Long-term loan - what is it?

A long-term loan can be defined as a form of loan that has an extended repaying period, usually from 3 to 30 years. Most of the long-term loans are considered under the category of "secured loans" since these loans will have an extended tenure and the lenders would require some asset as security or collateral to lessen their exposure to the possibility of default and to induce the borrower to make timely repayments. Some examples of long-term loans are - a home loan, education loan, car loan and certain personal loans.

Depending on the borrower's choice, a personal loan can portray the role of both, long-term as well as a short-term loan since prepayments on the long-term loans are accepted by the lenders due to their extended tenure. And, by making prepayments, the debt burden on the borrower gets lowered and lenders can collect money sooner.

Various long-term loan options with bad credit

A long-term loan can be defined as a form of loan that has an extended repaying period, usually from 3 to 30 years. Most of the long-term loans are considered under the category of "secured loans" since these loans will have an extended tenure and the lenders would require some asset as security or collateral to lessen their exposure to the possibility of default and to induce the borrower to make timely repayments. Some examples of long-term loans are - a home loan, education loan, car loan and certain personal loans.

Depending on the borrower's choice, a personal loan can portray the role of both, long-term as well as a short-term loan since prepayments on the long-term loans are accepted by the lenders due to their extended tenure. And, by making prepayments, the debt burden on the borrower gets lowered and lenders can collect money sooner.

Definition - refinancing of a loan

In simple words, refinancing of a loan refers to a process of applying for a new loan of the same nature but at the better terms this time to pay off the previously taken loan.