We have heard a lot about good credit scores and bad credit scores. This is not the same. Today the markets are flooded with tremendous choices and people are enticed to buy them all. Nothing comes for free and one cannot buy everything with their income. So it becomes tempting when the item you always wished to purchase is now available on easy instalments. The important question is should you buy it because it is now easier to buy it or should you buy it because there is a need for it? The answer to this question will make all the difference in your credit profile.
Aditya's decisions were driven by a need for something whereas Nitya's decisions were driven by her desires. And that is why Aditya had more of good credit while Nitya had more of bad credit.
Once Aditya was employed he did not rush to buy a car immediately. He spent more than six months travelling to and fro from work using public transport. During this period he searched the market for various options, assessed different possibilities like using a cool cab versus purchasing own car, would a motorbike suffice the purpose, if he did buy a car which one would it be, would he need a loan for it, how much would be left with him after paying his EMI, would that be enough to handle other expenses, etc.
Aditya spent a good amount of time in examining all possibilities. Finally, he bought a car - a Hyundai Grand i10, which completely fit his budget. He and his wife were extremely elated. Most importantly they did not feel the pinch of paying its instalments because they had planned and prepared themselves extensively.
Every month his CIBIL score just kept on improving because Aditya was able to handle this debt without adding to stress. It is important to mention that he would use his credit card for limited purchases and pay off all of it every month on time. This too helped him build his score.
On the other side, Nitya couldn't control her bouts of temptations to shop. She was under no debt initially. But she was hooked onto shopping online. Every day she would browse through online sites for newer things even though her wardrobes were stuffed. She ended up spending way beyond her affordability. She kept her card active by making the minimum payment every month. But, thanks to interest charged, her outstanding soon snowballed into a mammoth amount.
She decided to ignore her card and hoped that the card company would just write off her amount as a 'bad debt' in their books. Alas, that's not how it works. The card company constantly followed up with her for dues. After much dilly dallying, she co-borrowed a personal loan with her mother to pay off her card bill.
Since she didn't pay much attention to her score in the beginning she had to take a large personal loan at a high rate of interest, as her card bill kept on rising exponentially. Due to her actions her credit history was marred. It would take her a lot of time and effort to rebuild a fair score.
We are not trying to say that a car loan is good credit while a credit card or personal loan is bad credit. Essentially speaking, a good credit is one that is taken to fulfil a need. In this case the borrower is prepared for what is coming along and borrows only what can be repaid in full on time.
For example, you are planning to buy a house so you apply for a home loan. You understand the terms, analyse the amount you need, stay focussed and responsibly pay it back in time.
With every instalment paid on time, the bank reports to the credit bureaus that they have received your payment. This is recorded in the credit report. When other lenders see a consistent payment record in your credit report they conclude that you are a responsible and low risk borrower.
As the name suggests, a bad credit is the opposite of good credit. These are loans taken without a second thought, without assessing a real need for them. Such kind of loans become a burden for the borrower, making it difficult to repay in time and so their credit history simply goes for a toss.
We know one can’t take a loan for bad credit. But impairment from being financed is not the only implication. Many employers run a credit check for potential candidates before hiring. With bad credit you might lose the opportunity of being selected for the job.
In short, a good credit is one that helps you enhance your credit score, projects you as a low risk borrower, helps you take advantage of lower rates of interest and saves money for you. A bad credit is one that ruins your credit score, makes you look like a risky & irresponsible borrower and you may have to bear a high interest rate.
Be more like Aditya than Nitya for a better credit future.