Jagoinvestor
March 22, 2013
Do not close your Loans – If you want to improve your credit score!
Do you have a loan and want to close it as soon as possible? I know the answer is YES! . Everybody wants to get rid of debt and want to enjoy a debt free life. But, what if I give you a good enough reason to not close your loan and keep paying your EMI on time? And if I suggest you do that even if you have a lot of spare cash which you can use for paying of the loan. Lets see …
There are many people who are paying their previous loans, but when they apply for some new loan, its getting rejected because they have some bad credit record in past either due to settlement of some debt or because they have a bad payment record. This creates a very frustrating atmosphere, where you want to do something which you instantly make you a “good” customer. A big myth people have is that just because they have a loan going on, they are having a bad credit score, and because of this myth, they want to close off their existing loan.
However this is not true! Let’s see an incident which happened with Nagarajan
I was holding two home loans since 2000. I am a well paid professional drawing good salary, however due to frequent transfers my Post dated cheques were not replenished resulting in non-payment for over 6 months, Also due to some signature error a few times, cheque bounces happened, but they were repaid and corrected .
I dont posses any credit card. only debit cards were used regularly for any financial transactions. 6 months back a personal loan enquiry got rejected due to very bad credit score ( 450 only). so immediately I wound up all the loans ( 4 months ago). now I am loan free and no credit card holder. how long will it take to recover my credit scores ?
You would see how Nagarajan closed his loan thinking that his loan eligibility would increase because his credit score will improve. However what he did was totally wrong and the right thing was to just continue paying his existing loan. Lets see why.
Paying EMI regularly is a Opportunity to show your repayment capability
If you look a little deeper, you’d realize that your existing EMI payment is one of the only ways you can showcase your repayment capability. When you make EMI payment on time, this information is updated to credit bureau (CIBIL etc) by your existing lender and if done on a regular basis, it affects your credit score in positive way and also improves your credit report . Your Days Past Due (DPD) section in CIBIL report also gets positive because your recent information for last 36 months is there in the credit report.
So now I hope you are clear about the importance of paying your EMI on time on regular basis. Its one of the only ways you can build your repayment record and improve your credit score. Do you have a credit card or some kind of loan? If yes, then it might make sense to keep paying their dues on time just for making sure that you build your repayment history!
Can you share some thing related to this from your financial life ?
Thanks for the valuable information.
i have a Home loan from SBI sadar bazar agra branch with IFSC Code SBIN0002467 only 6 years are remaining for completions in loan..
What should I do can i foreclouse my loan or complete tenure of 6 years.
If you can continue, I suggest do that
Nonsense, this is trick of the banks to make you pay and live on debts lifelong.
Thanks for your comment Shankar
If you have no loan, there should be no CIBIL Score. If you have Loan please pay your all EMI’s within the Date, Its automatically improve your quality score.
Hi Manish,
This is Moonmoon here.
I got a Query. Just wanted to clarify it with you after reading the article.
I was having Study Loan of amount 1.7Lac. i had paid half of the amount. the other half bank manager is asking to settled and close it. Can u please tell me will it affect my credit score if I am going for settlement.
Regards,
M
Yes, its going to impact your CIBIL score. Please check with manager about the status remark which will be updated in your CIBIL !
i have credit card and one twoweeler loan going on. only one payment overdue pending in my twoweeler loan but i plan to apply personal loan coming agust so what i did to in crease my cibil score. option 1: paid that overdue amount and continue my loan EMI or option 2 : precolse that loan. Which is best?.
My credit card fully utilised and paid minimum due every month.
I suggest both things if its feasible for you, or atleast pay the over due amount !
My Cibil Score Is 659.May i get Personal loan from Axis bank?
Only Axis bank can tell that with assurity!
I have taken a personal loan.. that will continue for 3 yrs . Bank told me I can preclose after 6 EMI and I have completed 6 EMI.. I have money with me now and if I preclose it now, will it affect my CIBIL score ? and I will be in need of loan in coming year, will it affect it if I preclose it ?
It will not affect your score. go for it !
Thank you for your advice
I have a bad CIbil score 690. My loan got rejected. Is there any possibility to increase cibile score by making a 4 or 5 emi as one payment ill it increase score?
I dont think there is any shortcut for this as of now !
Hi, I just got my CIR from cibil. I have defaulted 2 credit card payments for 4 months(mar to june) continuously in 2014. But my score is 792… will I get a loan of 4lacs.
We cant assure that. It would depend on the lender on how they see your report
Thank you very much for thr info
Hi Manish,
Could you please clarify my confusion on below points.
I am working in a foreign bank IT department as Software professional in pune. I am basically from Bokaro Steel city. we have a house (Home loan 8 L) in my home town on my mother’s name. My both parent are borrower in that loan. Now we need some money.
So we have two option –
1. Clear the loan amount and sell it to some one out side.Its current price 30 L or
2. I can purchase this property by taking a home loan(25L), so house will be within us and also I can take the tax benefit of that loan, so i am planning to purchase that property after clearing all the previous loan amount on that and then take a loan on my name.
Confusion or Query
1. whether ,Sell and purchase of property within family (between mother and son) will effect my loan eligibility criteria, as we are two brother(he has no objection on this decision, its mutual).?
2. Banks will give me loan or not as i am working in Pune and property is in Bokaro.?
3. I will not be staying in that house but my parent, So how can i use the tax benefit of this loan.?
4. Closing/settling down this previous home loan will have any side effect on me?
Thanks in advance
Bipul
Hi Manish
I have credit card outstanding of 2.5 Lacs and paying interest of 12.5k per month.. now I want to close this outstanding by taking personnel loan. And parellelly one personel loan is running. But I have paid loan and credit card min dues on time since one year. Whether this heavy credit card outstanding leads to my personnel loan rejection.? Whether banker considers the credit card outstanding also?
Definitely it can lead to rejection. You are anyways defaulting on one payment, which lender will take the risk of giving money for this ? I am not saying with 100% surety, but try your luck , you might also get the personal loan, but I personally doubt it ! . A better option is to talk to your credit card company and explain them that its getting difficult for you to pay it and soon you might default , hence they should just convert the whole money to EMI and that way you would pay it soon in some years !
Let say I have taken a loan now.. that will continue for 3 yrs . But the purpose for which I took loan is resolved. I have all amount with me I want to close loan after 6 mnts ( As I can close after 6 months only ).. So is it better to continue till 3 yrs ??.
I suppose no as I calculated I will be paying almost 30 thousand extra if I continue the loan ( Loan amount 2lac for 3 yrs with 16.0 roi)
You can continue if you want some other loan in future and want to build a good history , else close it
Please Help Me year of 2006 I am taken PL Form Citi Bank I am Pay 4 to 5 EMI Only my finance Condition very bad last 6 year Just i improve finance Condition how to pay my amount pls Advise
Hi Manish,
I agree with you that paying your loan EMI on time definately improves CIBIL score.
I was also amazed to see the Title of this article but after reading full article my ‘amazed expression’ converted into ‘Smile’ because in next few days i am going to close a Loan and thanks to your previous article abt “How to improve ur Cibil Score’ I have decent Cibil score so i can close it without any worry… 🙂
Great 🙂 ..
There is only one purchase in life that one should take a loan out for. It is to buy a house, since it’s price is most likely to be a few factors larger than one’s annual income. Anything else, including a car, save up and pay cash. Because paying long drawn out EMIs is the worst way to remain a slave to the banks (or any lender) . If using a credit card responsibly, ( i.e. paying off the balance every month) improves your chance of getting a good credit score, and thus get a decent rate for a home loan, then that is the only reason to care about credit scores.
1. Take a loan only to buy a home
2. Pay it off as soon as you can, by prepaying the principal whenever possible
3. Do not ever care about your credit score again.
4. Beach . Bahamas
Thansk for your views on this topic !
Senthil your generalized view is not true in all cases, it depends on the individual and the situation too. Suppose I have full cash to buy a car but the same time if I get a good auto loan deal from the dealer say for 2.99% or 5.99%(some times I have seen/heard dealers offering 0% offers too), then I can park my lump sum money in a FD or other avenues where I get more interest and utilize the loan. It is also the same case with home loans there are many different where you can make definitely more than your home loan interest, it is all about wise financial planning!!
dear all,
you all are right, but dear manish is not wrong, may be just some english vinglish, heading hooding created flutter.
let us leave it and get the essence of the thing.
one can go wrong ( or little off track) only when one does ( drives ) something.
that is why people like me feel we are right most of the time because actully i do not do anything, so how can i go wrong
regards
?????? hey english-vinglish problem is with you and not with manish.
thanks
Hi Manish,
Seeing my father paying interests for his loan in his entire employed life, I have very strong aversion to loans/house mortgages. So obviously I don’t have any credit card. I earn decent sum and we live within means.
Now the question/concern I have is, should I bother about credit score? Please advise.
Best Regards,
Sayee
You need to worry about it only when you need a DEBT in your life. Right now you might feel that you dont need any loans in future and can forget about these things .. but in future if you want one, then you need to have a better score and report . Ideally if you do not make any mistakes, there should not be much issue anyways !
Hi Manish,
Very badly researched article.
Credit score depends upon 3 factors
1. Your loan eligibility and how much amount you are using monthly. This includes your credit card and every other loan.
2. How much amount you are paying monthly for your loan amount
3. How much longer these loans are available. they take consideration of oldest account.
So if you pay your home loan other loans you are good since you still have credit card. Since your credit card is many times bound to be oldest than home loan that will not be considered for considering oldest loan and calculating your credit score record.
Infact many of the companies are moving towords FI score which considers
discipline rather than age of loans.
Case you mentioned in the article, low score is because of non payment and it will not be removed for next 7 years.
Hi Amrut
A loan is an opportunity to show the repayment record. A lot of people who have some loan to pay and they are fully capable to pay the EMI , still close the loan in one shot because they feel that their bad score will improve with that . But thats not true . By closing the loan in one shot , they are loosing an opportunity of showing to the company their capability to pay off the dues on time . I am not talking about good habits here , yes, paying off the loan early is a good habit , but if one has a bad score, paying the EMI over long term will have a positive impact on the score .
Should not CIBIL impose a 7 years data transaction ban on the banks charged with money-laundering and black money hawala? Or it is also financed by those banks?
Very much non-Manish type article by far. Remind me the flavor of financial gossips in office canteens.
Hi Bikash
Not sure why you feel its not a regular type article. All the article is doing is stating the fact on how closing a loan in one go can impact one’s report because then one does not have any repayment opportunity which helps in building a score . note that I am not talking about pre-payments here , not am I talking about someone who already has a good score . I am talking about those who have a bad score and just to improve that score, he closes off his loan because he thinks that closing it off will help his score.
Do you have a counter argument on that fact ?
Manish
No counter argument on this fact. But it would have been better and accurate if the heading was like “Closing a loan degrades ones CIBIL score” or something similar. Again the heading should not matter much. Please keep on good effort.
Also I like to mention: The fact “Closing a loan degrades ones CIBIL score” will hurt
1> Those who takes max 2/3 Home loan,1-2 Car loan, 1-4 Personal Loan and 1 education loan in their entire lifetime. (Because they will feel like a slave to financial institution)
2> The financial advisors who told their client to close most of their loans with disposable income after 2008 market crash and subsequent crashes. (Because they may lose some HNIs client.)
3> The banks depends on CIBIL score (As it will restrict fresh loan customer to some extent.)
4> CIBIL. (Due to reducing customer base in long term. Ultimately banks has to keep their business healthy rather than policing financial behavior of their client.)
Yes Bikash
Agree with you , the heading can be better to communicate ..
Hi Manish,
I think the heading and contents are apt for those who have negative credit score — like in the example you mentioned. They have no other way to improve their credit score other than continuing their loan (as he doesn’t have even a credit card).
But i think it shouldn’t matter closing a loan well ahead of its term if i have a good score. Obviously we lose a lot paying interest instead of closing the loan. This is even worse if the person opted for a long duration loan (say 20 years) as he will be paying interest more in the first few years.
True .. The article is only meant for those who have a bad score. Its clearly written in article about the situation when this point will help , May be I need to make it more clear .. some people are taking it as a general recommendation , which is not true 🙂
Hi Manish
Article heading itself is making it a generalized article for everyone. It does not seem to be only for those who have bad credit scores.
Yes , let me change that
Manish,
I somehow disagree with this analysis. My personal experience is best example for this. I’ve credit score of 830 (I think this is good). In last 6yrs I’ve used all types of loans and none of them were continued till end of their term. Some were closed halfway through by me and some were ended before end of the term because of partial payments. I never missed a single payment due date in all of these loans. I also maintain couple of credit cards and never missed my payments. Even I used max limit of those cards several times but never missed a due date.
I think credit score always represents how disciplined you are in terms of cash flow and maintaining your credit/debit. That’s simple rule I guess which will give you better score.
Jayaprakash
IN this article we are talking about a case where a person has a very bad score, lets say 550 or 580 for example . He has a loan which is running and to just improve his score, he feels that it will improve if he closes the loan in ONE SHOT by paying off everything . Which is exactly opposite of what happens in reality . A score is a function of how desciplined you are in paying your EMI’s on time ,and a loan is a opportunity to show that to the debt company . Closing a loan in one shot is like loosing an opportunity .
In your case, you already have a number of loans which were closed by part payments and some times in one shot, but you had other loans running to show your payment capabitlity . When calculating your score, your past history and consistency of payments are looked upon . Not sure which point you do not agree upon ?