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Why having multiple loans is bad for your credit health- A case study

  Wed, Feb 01, 2017     written by : CSF-Team
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When Indranil Roy, a young man born and bred in Kolkata got placed in an MNC in Mumbai his mother was overjoyed. According to her, her son had finally arrived and was about the take the world by storm. Indranil's father, a banker by profession who had two years till retirement was a tad worried, knowing that his son could be careless regarding money matters.

Thus, when he was leaving home, his father asked him to be judicious with the money he would now be earning and not squander it away, much to his and his mother's chagrin. Senior Mr Roy's worries however refused to go away with good reason as he had seen too many youngsters seeking a bad credit fix in recent times.

With the help of his friends who lived in Mumbai, Indranil had no trouble finding a studio apartment in Khar that was a barely a 15 minutes auto rickshaw ride from his office in Santacruz. Jovial and easy-going on the one hand and a quick learner at work, Indranil soon became popular among colleagues and seniors alike. Earning a handsome salary of र 35,000 as a newcomer he wasted no time in applying for a credit card. Right at the beginning of his career, the credit limit on his card was र 1 lakh and Indranil was more than happy. Within a month of arriving in Mumbai he bought a guitar worth र 25,000.

Soon, there were visits to sports bars and Friday night parties, and often the magnanimous Indranil Roy was picking up tabs of र 7000 - 8000 every other week on his credit card. It was all going well until he received his credit card statement. He had already spent र 65,000 on his credit card and there was no way that he could pay it back within the billing cycle. Besides, Indranil checked that his CIBIL score had dipped to 730. Quite distressed about the situation, he asked an office colleague for advice and he suggested that Indranil take a personal loan for low CIBIL score of र 1 lakh for 36 months that would help him clear off his debt at one go. Indranil wasted no time in applying for the personal loan for low CIBIL score and the money arrived in four working days. Overjoyed, Indranil cleared off his credit card debt and with the balance र 35,000 he bought an expensive phone.

By now, six months had passed for Indranil in Mumbai and he now had a girlfriend. Auto rides seemed tacky now and Indranil applied for a two wheeler loan of र 55,000 for a tenure of 24 months. In addition to his personal loan EMI which was र 3352 his bike loan EMI worked out to be र 2876 bringing up his total EMI outgo to र6228. That was not all. Indranil now knew all about bad credit personal loans and applied for a second personal loan of र 75,000 for 36 months to buy a designer dress and accessories for his girlfriend. This added another र 2490 to his total EMI amount र 8718.

That apart, Indranil was far from having learnt a lesson from his earlier credit card debacle. In a bid to impress his girlfriend with more expensive gifts, he racked up a debt of र 45,000 on his credit card once again. He thought that loans for bad credit would come to his rescue once again, but this time he was in for a rude shock.

His application got rejected because his credit score had dipped below 650 and no lending institution was ready to give him a loan. Unable to find a way out, Indranil had no choice but to call his father who had at some level expected his to come with a problem of this nature sooner than later. A seasoned banker, he explained that taking multiple loans had been a folly on his part. Indranil was unable to understand how his credit score dipped to 630 out of 900. His father explained that there were three things that went wrong in Indranil's case and impacted his credit score negatively and why he needed a bad credit fix:

  • He had applied for too many loans in a short time frame (less than a year) that made him seem credit hungry to prospective lenders.
  • Each time he applied for a personal loan or a credit card, his credit score took a hit on account of a hard inquiry. Every time a person makes an application for a fresh line of credit, the lender makes a request with the credit bureau for his credit score and report. A request by a lending institution is called a hard inquiry in financial parlance that brings down the credit score of an individual
  • Lastly, there were too many unsecured lines of credit that Indranil had applied for that led to a disparity in the balance of credit. To build and maintain a good credit score, one should have a good balance of secured and unsecured credit. Indranil had two personal loans, one credit card and one two vehicle loan, that tilted the balance towards unsecured credit.

Indranil understood his mistake, and asked his father for suggestions. His father suggested that he must pay off the outstanding balance his high interest credit card at the earliest. To help him achieve this goal, his father gave him र 35,000. Indranil had an emergency fund of र 10,000 which he added to the amount and paid off his credit card debt in full. His father also helped him consolidate his debt by taking one single personal loan for people with bad credit to the tune of र 1,75,000 at an interest rate of 24% for a period of 60 months. This brought down his overall EMI to र 6878 resulting in savings of nearly र 2000.

Indranil followed his father's advice and has already improved his CIBIL score to 700 over a period of the last 8 months. He also uses his credit card judiciously and never spends more than what he can afford to repay within the billing cycle. Indranil had to learn a lesson in credit health the hard way, but if you are reading this today, we hope this will serve as a lesson in maintaining good credit health for you and you will not end up in a loan defaulter list.