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Credit Habits to Implement for a Smooth Loan & Credit Card Journey

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Highlights

  • Want a smooth loan & credit card journey? You will need to implement some good credit habits
  • Some of these will be paying loan dues on time, using the credit card judiciously, etc - Read here such habits in detail.

A loan or credit card when handled with care brings optimum results for an individual. Not only do you fulfill your needs easily, but you also pay less. It is like a win-win situation for you! But when you go the other way round and commit a credit default, problems will pile on. The problem may not be the same, but it is going to bother you. While defaults on loans like home loans and loan against property make us lose our loved possession i.e. home, the same mistake committed on a personal loan and credit card will make us deal with non-stop legal notices.

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So, if you are yet to kick off your credit journey, this post can be of great help to you. Here, we will discuss the credit habits that you can implement for a smooth ride.

So What are the Credit Habits One Should Implement?

A loan should make you feel at ease rather than becoming a burden for you both financially and mentally. That’s why implementing good credit habits like making loan and credit card payments on time, taking the right loan amount, using the credit card judiciously becomes so important for ensuring financial harmony. We have elaborated on all these credit habits below. Take a look.

Make Timely Payments

Honest borrowers who pay their loan EMIs and credit card bills on time are often rewarded with exciting credit offers such as pre-approved loans, credit card upgrades, and much more. Maintaining this credit habit will give lenders the impression that you are managing your debt smoothly. The honesty you show here will reflect positively in your credit score. A good credit score is 750 and above. With such a score, lenders offer you exciting credit deals.

Don’t Make Frequent Credit Applications

Some people keep committing the mistake of applying for loans and credit cards frequently despite constant rejections from the lender. Such credit habits will bring more worry than good fortunes. Stop applying and find the reason for rejections. The reasons can be many; your credit score could be low or your income is not sufficient to get the loan amount or credit card you seek. You can check all that with the lender. If the poor credit score comes as a reason, you can check your credit report prepared by CIBIL and other credit bureaus. It will have the reason mentioned there along with the suggestions. Follow them and build a good credit history over time to gain the nod of lenders.

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Use Credit Cards Judiciously

Credit cards can enable so many things for you by helping you book your travel tickets, earn you rewards and cashback on your purchases, etc. But in a bid to maximize these benefits, most shop without giving any thought to their financials, like how much they earn and how much they can afford to spend. This is one such credit habit that you should not follow. Because it will most likely lead you to pay the due partially and deal with a massive interest rate of 30-45% per annum. So, choosing the credit card that meets your needs perfectly will be one credit habit to implement.

For example, you earn INR 40,000 a month and a credit card comes with a fee waiver on spending INR 1 lakh a year. Monthly, you need to spend around INR 8,000 to achieve that milestone. The spending requirements are less than 10% of your income. Most likely, it will be a good credit card for you, provided it will have other features that you want. But if the monthly spending requirement to achieve the waiver is around 20% of your income, you should either avoid such a credit card or not go for the waiver. Those in the high-income bracket can afford such spending though.

Apply for the Right Personal Loan Amount

This is one of the credit habits that many don’t follow particularly well. Often we discount the importance of savings and end up applying for a much greater loan amount than we would do otherwise. You might be eligible for a higher personal loan amount, but going for the same may not prove right. One can’t deny the uncertainties hindering someone from paying a greater EMI, which could be the case with a higher loan amount. So, if you have accumulated decent to large savings, don’t mind using some of it to reduce the loan amount and the payment obligation that follows.

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Use More Savings to Reduce Your Home Loan Payments

The surging real estate prices have meant the average property market rates are falling in the range of INR 30 lakh-60 lakh these days. Plus, it is not financed fully. Lenders offer home loans upto 75-90% of the property cost. The remaining portion i.e. 10-25% is your obligation to fulfill. It is called down payment in the home loan terminology. So here, you will need to use your savings anyways. But if you have more savings than what’s required, don’t hesitate to use them. It will only help you reduce the loan amount as well as interest payments. Look at the example below and see how it happens.

Example – You want to buy a property worth INR 50 lakh. As per the Loan to Value Ratio (LTV) norms, you can get a loan of around INR 40 lakh. You will need to pay another INR 10 lakh from your end. But if you have savings of around INR 18 lakh, you can use INR 13 lakh of it and reduce the loan amount to INR 37 lakh. How much can you save using the extra INR 3 lakh towards the down payment? Let’s find out in the table below considering the rate of interest and tenure to be 7.85% per annum and 20 years, respectively.

Home Loan AspectsWhen Taking a Loan of INR 40 Lakh (In INR)When Taking a Loan of INR 37 Lakh (In INR)
EMI Payable @7.85%33,08530,604
Interest Payable @7.85% Over 20 Years39,40,43836,44,905
Total Amount Payable79,40,43873,44,905

From the table, you could understand the importance of using additional savings to reduce the home loan payments. You are saving in terms of both EMI and interest payments. While on the EMI, you will save about INR 2,481 (33,085-30,604), the savings in interest goes to INR 2,95,533 (39,40,438-36,44,905).

Choose the Right Home Loan Tenure

The importance of choosing the right tenure is perhaps more in a home loan given that it can run for a maximum of 30 years. The longer the tenure will be, the greater will be the interest outgo and vice versa. Yes, a longer tenure keeps the EMI lower. But that does not mean you will like to pay more interest to the lender. At the same time, you need to earn enough to be eligible for a shorter home loan tenure. The reason being the EMI will be greater. While ascertaining the home loan eligibility of candidates, the lender also checks whether you have any existing obligations. If so, it will review the disbursal amount. This is where your income comes into the picture.

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Ideally, lenders like to see the proposed home loan EMI and any other obligation do not go beyond 50% of the net monthly income of an applicant. However, if the income falls in the higher income bracket, the percentage you see can be allowed to go up. In case you have the income that allows a greater EMI, curtailing the tenure can be a good idea for you!

Maybe we should consider an example to understand this aspect better.

Example – You are earning INR 1.20 lakh a month and are mulling a home loan of INR 50 lakh for 20 years. If you curtail the tenure to say 17 years, how will the repayment fare and whether you will be eligible for the same? Let’s find out!

Assuming the Interest Rate to be 7.85% Per annum

Home Loan AspectsWhen the Loan Runs for 20 Years (In INR)When the Loan Runs for 17 Years (In INR)
EMI Payable @7.85%41,35644,467
Interest Payable @7.85%49,25,54740,71,277

The EMI does not increase by much when taking a loan for a shorter tenure of 17 years. And when you look at the overall savings of INR 8,54,270 in terms of interest outgo, you won’t mind curtailing the tenure to 17 years and paying a slightly higher EMI. Given the income you have, the lender won’t have any problem in allowing you such a loan tenure. Only when there are existing obligations, the lender will assess the loan offer more carefully.

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Personal Loan Interest Rates October 2020
Fullerton India14.00% - 33.00%
HDFC Bank10.75% - 21.45%
ICICI Bank10.75% - 18.49%
IndusInd Bank11.25%
Kotak Bank10.99% - 20.99%
RBL17.50% - 24.00%
Standard Chartered Bank11.00% - 15.00%
Tata Capital10.99% - 18.00%
Home Loan Interest Rates October 2020
Axis Bank7.75% - 8.55%
Bank of Baroda7.00% - 8.40%
Citibank8.20%
HDFC6.90% - 7.65%
ICICI Bank6.95% - 8.05%
Indiabulls Housing Finance Limited8.80% - 11.05%
Kotak Bank7.20% - 9.30%
LIC Housing6.90% - 7.90%
Piramal Capital & Housing Finance9.00% - 9.10%
PNB Housing Finance7.90% - 9.20%
Reliance Home Finance8.75% - 14.00%
State Bank of India/SBI6.95% - 7.60%
Tata Capital9.20% - 9.35%