It’s usually advised to avoid taking a loan especially for buying luxury items. However, to purchase long-term assets – like buying house properties, or to enhance income capacity – like buying and installing plants and machinery, getting higher education to enhance employability, etc – loans may be taken.
To avoid taking loans for non-productive purposes, you should inculcate good financial habits and limit the expenditures well within the limit of your income. Apart from investing the money saved to fulfill your financial goals determined through proper financial planning, you should also use a part of the money saved to create an emergency fund to ensure ready money is available in short notice during any unforeseen exigencies.
Taking an adequate insurance cover is also necessary to minimise the cash outflow during the happening of an insurable event.
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Even though one should avoid loans for buying luxury and depreciating items, there may still be some needs of taking loans during an emergency situation despite having a proper financial plan in place.
So, even if there is no requirement or intent to take loans, you should keep your credit score high, so that in case of an urgent requirement, you may get a loan at a cheaper rate and in a favourable terms and conditions.
CIBIL Score
The Credit Information Bureau (India) Limited (CIBIL) is the organisation that maintains the credit scores of people in India.
“CIBIL is the credit rating firm managing the credit history of over 550 million customers and organisations with over 2400 members including financial institutions, NBFCs, banks, and home financing businesses. It plays a major role in building the primary and immediate impression of the borrowers,” said Mahesh Shukla, CEO & Founder, PayMe.
“With higher CIBIL score, borrowers get greater chances of a loan being granted. On the other hand, with lower CIBIL score, even if the loan is being granted, the interest rates might be imposed at a much higher rate than normal,” he added.
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How to improve credit score
According to Shukla, some of the key tactics through which a borrower can improve their CIBIL score are by –
- Setting reminders for payment and being disciplined with the credit.
- Customising the credit limit by carefully analysing the credit utilisation ration.
- Keeping to check the credit report.
- not applying for credit if rejected.
- Paying the credit card dues on time.
- Not taking loans on credit cards.
- Opting for a longer tenor while applying for loan.
- Avoiding to take too much debt at one time.
