How Credit Utilisation Ratio Impacts Your Credit Score?

Holding a credit card has much more significance than just being a means of payment. Your credit card transactions and its usage directly impacts your credit utilisation ratio. Before delving deeper into the subject, it's critical to understand - “What is credit utilisation ratio?” 

In simple words, credit utilisation ratio is the sum of outstanding balances of your credit cards divided by the total outstanding of all your credit cards. This means that if your credit card limit is Rs. 1,00,000, which has an outstanding balance of Rs 40,000 then your credit utilisation ratio is 40%. 

Why Credit Utilisation Ratio Matters?

Credit utilisation ratio constitutes 30% of the CIBIL score report, which explains its significance in deciding your credit profile by lenders and financial institutions. High credit utilisation ratio for an extended number of months is a red flag to lenders and can hurt you're borrowing abilities. Even timely monthly payments fail to justify the high credit usage against a credit card and continues to dampen one’s credit score. According to set guidelines, a credit utilisation ratio of 30% and less is seen as an optimum percentage to keep. 

After knowing the threshold, it is only natural to ponder on ways to keep it in line with the number, particularly during those times when credit card spends could surge due to sudden expenses. Here are some handful of ideas that will help you to manage your credit card spending in the best possible way. 

1) Splitting up expenses across multiple credit cards - Plan your expenses wisely to balance the amount across credit cards. It should not happen that one credit card is over utilised while the other remains under utilised. Credit utilisation ratio is calculated both collectively and separately on each of the credit cards. Therefore, if two credit cards have a credit limit of Rs 50,000 each and a total of Rs 25,000 is spent on both cards, then the ratio is well within the limit of 25%. 

2) Making part payments - If splitting up expenses does not lower the credit utilisation ratio then consider making part payments before the billing cycle ends. Part payments will immediately reduce the outstanding balance, which will bring down the ratio as well. However, this will also reduce the free credit period that you are entitled to. 

3) Increasing credit limit - If the above two methods fail to work, then boosting credit card limit could be another way to handle increased credit utilisation ratio. Remember that it will be difficult to get another credit card as high credit utilisation ratio may not make a case for issue of a new credit card. In such a scenario, it will be prudent to ask for an increased limit on one of the credit cards against a valid reason. 

Meanwhile, take time to learn you're monthly spending patterns and cut back on those expenses that  seem to be avoidable. Further, consider dividing expenses among credit and debit cards to lessen the credit score hassle. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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Transferring Home Loan? Be Ready For These Hiccups

Any hint of a drop in interest rates prompts home loan borrowers to review their existing debt and transfer it to another lender in a bid to reduce interest outgo on loan. However, the entire process is not at easy as it sounds due to the amount of paperwork and time involved in transferring an existing loan to a new lender. In fact, transferring the loan from one lender to another implies going through the same formalities as applying for a new home loan. 

It is recommended that borrowers should first try to negotiate with their existing lenders to bring the interest rates down in line with the offered rates for new borrowers. But, if there is no point in negotiating then be prepared to transfer it to a new lender. This requires one to be careful of few hurdles that can hit them along the process. 

1. Responsibility of submitting originals lies with borrower - An existing lender will be reluctant to hand over the original property documents to the new lender and rather assigns this responsibility to borrower. It will be the onus of the borrower to collect originals and submit it to the new lender to complete the disbursement.
2. Fee for reduced rates - Few lenders charge a fee to reduce rates on an existing loan and it is best to avoid such lenders for continuing your home loan. In such a scenario, switching lender is the only alternative. 
3. Foreclosure letter skips basic details - A ‘foreclosure letter’ is issued by an existing lender, specifying the amount required to foreclose the loan. However, many times, banks release foreclosure letters that are not clear in terms of interest applicable per day, thereby, delaying the process itself. Also, a foreclosure letter should not be time-bound, i.e., it should not give a time-frame of foreclosing the loan. Borrowers should carefully take note of these points before proceeding to transfer their loan to a new lender. 
4. Letter of confirmation for originals - A lender is obligated to provide a letter of confirmation to the borrower for the original title documents that it holds against a loan. Several new buyers, being unaware of the process, miss to collect this letter in the beginning, which could turn out to be a major roadblock later. 
5. Careless approach - An existing lender can become extremely careless when it comes to co-ordinating the loan transfer process as it translates into a loss of business for them. Therefore, a borrower should actively participate in carrying out the transfer formalities himself in order to save much of the time.  

To avoid these hurdles, it is only prudent for an investor to be clear with the requirement and formalities of transferring a home loan. Better to get a written advice from both current and new lender on their own requirements to steer clear of any verbal confusions later. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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Five Mutual Fund Myths That You Should Overcome

Mutual funds, despite a well-regulated way of investing, continues to be engulfed with several myths. It is these misconceptions that prevent potential investors from investing in this asset class. 

Here are some of the common mutual fund myths listed out to empower investor fraternity in overcoming them. 

Image Source - Ognian Mladenov via Flickr 

Myth 1 - Meant for big surpluses

Many individuals believe that investing smaller sums into mutual funds is futile unless they have a sizeable surplus to spare. However, this notion is downright misplaced because mutual funds work as effectively for smaller sums as they do for larger sums. In fact, postponing investments might mean eroding the true value of investment surplus itself. 

Let’s understand, how delaying investments can hurt return potential.

Investment Amount Per Month	Postponing 1 Yr	Postponing 3 Yrs	Postponing 5 Yrs
INR 500	₹ 6,323.64	₹ 21,341.56	₹ 40,185.05
INR 1000	₹ 12,647.29	₹ 42,683.12	₹ 80,370.10
INR 2000	₹ 25,294.57	₹ 85,366.23	₹ 1,60,740.20
INR 5000	₹ 63,236.43	₹ 2,13,415.58	₹ 4,01,850.51

Myth 2 - Expertise 

Investors shy away from mutual funds due to lack of expertise or knowledge about mutual fund offerings. Questions like ‘What if I have chosen a wrong scheme’ or ‘If I will lose money’ limit their exposure to mutual funds. The only way to deal with this myth is to seek advice from a qualified adviser and ask more questions to steer away from doubts. 

Myth 3 - Ratings are the best tool to judge performance

Ratings or rankings of a fund do provide information on a scheme’s historic performance but it does not guarantee sustainability of performance. A top-ranked fund could drop to the bottom if there is a change in fund manager, portfolio holdings or any other key aspect directly related to its performance. Ratings should not form the sole basis of choosing an investment but other factors such as investment goal, fund manager, risk, expense ratio, etc. should also be evaluated.

Myth 4 -SIPs are always better than lump sum

Drive to channelise even smallest of investments into mutual funds through SIP gradually led to a myth that SIPs are superior to lump sum. However, it is not the case always and there are several pros and cons of both modes of investment. SIP investment are susceptible to market losses like lump sum investments, perhaps in a less volatile way. But, this fact alone should not render lump sum as an unworthy mode of investment. Scenarios, where lump sum can be appropriate over SIP, has already been discussed in our previous blog. 

Myth 5 - Mutual Funds are only equity-oriented

It is not uncommon that investors interpret mutual funds synonymous to equity investments. This is the reason why those who have burnt their hands in stocks prefer to stay away from mutual funds as well. However, this is not true as mutual funds offer various schemes including debt and liquid schemes. Mutual funds serve not only as an alternative to equity stocks but also to fixed deposits, savings account and gold. 

If you have been gripped by any of these mutual fund myths then its time to break away from it and start investing.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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