How to improve your credit rating

Credit Score is a relatively new term in India after the CIBIL (Credit Information Bureau India Limited) came into effect in 2000, and it is catching up fast. CIBIL -- India's first credit information bureau contains the credit history of commercial and consumer borrowers.

A Credit Information Report (CIR) is a factual record of a borrower's credit payment history compiled from information received from different credit grantors (eg banks). Its purpose is to help credit grantors make informed lending decisions -- quickly and objectively.

The CIR includes the following information:

• Basic borrower information like:
• Name
• Address
  In case of individuals:
• Identification numbers
• Passport ID
• Voters ID
• Date of birth
  In case of non-individuals:
• D-U-N-S Number
• Registration Number
• Legal Constitution
• Records of all the credit facilities availed by the borrower
• Past payment history
• Amount overdue
• Number of inquiries made on that borrower, by different Members
• Suit-filed status

It is important for both the borrower and the lender. It will provide borrowers with fast and easy access to the lending resources they need. The use of CIRs will enable loan officers to make objective and informed credit decisions quickly and cost-effectively. This would result in lower cost to the lender and a part of these reduce costs will be passed to consumers with good credit performance in the form of lower interest rates.

How can you improve it?In order to ensure a good credit history, it is important to re-pay your loans on time. Financial discipline coupled with prudent credit management and a good payment history will ensure that you enjoy all the benefits associated with having a good credit record.

• Making your payments on time will have the most significant impact on your credit record. It is important for you to maintain appropriate, reasonable and affordable levels of credit and ensure regular and timely re-payment of loans.
• Keep your total debt under control. If your total borrowings are significantly high, use some of your savings to repay some of your debt.
• When you are seeking for a new loan or credit card, do it in a relatively short amount of time. You don't want to have your report show that you are constantly looking for credit!

You can access your CIR report at www.cibil.com/accesscredit.htm.

Ten things you must never do

• Make a late payment
• Pay only the "minimum amount due"
• Apply for new loans/ credit cards if you already have existing ones with a lot of debt
• If there's a late payment/ incorrect entry on the card, ignore it
• Leave old outstanding amounts as they are
• Not check your credit limits
• Use multiple credit cards and not track them
• Spend even while you are in the 'red zone' (negative cashflow)
• Pay for today's expenses with future incomes' expectations
• Carry forward loans from one card to another

Zero per cent schemes: How consumers get fooled

As a child when my first milk tooth fell, I was told to keep the tooth under my pillow at night. When I woke up the next morning, I was delighted to discover a one rupee coin instead of my tooth under the pillow. When I asked my parents about it, they told me that a tooth fairy had switched my tooth for a rupee coin during the night.

As a child the story had lots of appeal for me. Of course as I grew older I realised that there was no 'tooth fairy' and my parents placed that one rupee coin.

The stories surrounding zero per cent finance schemes are perhaps of the same genre. The old adage that 'there is no such thing as free lunch' aptly describes the zero-percent-interest schemes.

These schemes were widely popular till a few years back. RBI regulations advising banks to refrain from offering such schemes as well as the general withdrawal of major banks from consumer durables financing has meant that such schemes have not been in vogue for the last 2 to 3 years.

However there are several NBFCs (Non-banking financial companies) that continue to finance consumer durables purchase and also have zero per cent schemes. The main attraction of such schemes is that they influence you to purchase consumer goods that could be more expensive than your wallet size.

The lure of zero percent interest is an added attraction that makes you feel that 'YES' I am getting something free and thus I am able to buy a 'bigger and better' product. But that is just a smart way in which such schemes fool you. Here's how.

So how do these schemes work?

Unlike their names, most zero percent schemes have other costs in built. The biggest cost is that you forfeit the cash discount that you would have got otherwise from the retailer. Also you will be paying some processing/transaction fees and/or advance EMIs (equated monthly instalments).

So let us see how the costs stack up in a so called zero percent scheme.

Example: An LCD colour television costs Rs 48,000 and is available on zero percent EMI scheme for six months (thats is, there is a EMI of Rs 8,000 per month for six months). The consumer needs to pay a processing fee of Rs 1,000. If the customer had bought the same TV by making a full payment s/he could have availed of a cash discount of Rs 2,000 which s/he is not getting if s/he opts for the zero percent scheme.

So it works out like this:

Cost of television set: Rs 48,000

Amount paid/Cost incurred in advance:

Processing fees: Rs 1,000
Cash discount foregone: Rs 2,000
Total: Rs 3,000
Net finance received: Rs 45,000

Payment made by six instalments of Rs 8,000 each (aggregating in all to Rs 48,000 against finance received of Rs 45,000).

The effective interest cost works out to 23 per cent per annum.

Why consumers fall prey to zero per cent finance schemes

However the popularity of such schemes with consumers particularly in festive season cannot be denied. Market sources say that despite being costlier in some ways, consumers prefer to go for these staggered payment schemes and have been highly successful in pushing sales and expanding the market for the durables. This is primarily because of the fact that purchasing through credit cards is very expensive as compared to purchasing through these schemes.

Also, the success of these schemes can be attributed to the availability of credit at the point of purchase, minimal paper work, small ticket size and hence a not-so-stringent eligibility criteria.

So are there any true zero per cent schemes? Yes there are.

Some of them are available on the much-maligned credit cards. The credit card that I have allows me to convert specific spends greater than Rs 5,000 into three-month EMIs without any cost or fees. This is the closest that hard-nosed bankers come to offering true zero per cent schemes. Some other major credit card issuing banks also have similar schemes.

All said and done, the best way to check if a zero per cent scheme is really worth it ask the following questions:

Any fees or charges?

If I pay full amount do I get a discount that I am not getting if I take the zero per cent scheme.

If answer to both the question is no then you have a true zero per cent scheme! So you can now zero in on your zero per cent schemes and spare yourself from being fooled.