Optimising your financial borrowings
Moneylife Digital Team 04 February 2019
“Whether we should borrow is a question for every individual. It is not a question restricted to individuals who have no other resources available,” says DG Kale, retired CGM from Reserve Bank of India. Even a person with resources can go for borrowing, because it entirely depends on the efficiency with which capital is allocated. He was giving a talk on “Optimising your Borrowings” at Moneylife Foundation and he firmly believes that the decision to borrow entirely depends on how carefully one has planned their finances. 
 
When speaking about finances of a particular individual there are essentially two clear portions - one is the absolute numbers and the other is the non financial aspect, based on which an individual is assessed. Mr Kale informed in his talk, that this is part and parcel of a standarised “assessment” that takes place with banks, credit or loan agencies. One of the foremost things to consider when thinking about borrowing from a financial institution, is the psychological self and determining how much one knows about oneself. Mr Kale is of the belief, that starting here would allow a person to understand how the opposing party might assess them in the loan application process. It is important to note that the other person would be looking at an individual impersonally, only looking at the financial numbers that one has provided. Based on those numbers, an analysis is done to determine how a particular individual would behave in the future. 
 
 
It may be surprise to many, that these days even the social media profile of the applicant is taken under consideration when a the applicant is assessed. Mr Kale says, “The more number of friends you have, the less you can depend on them. Fewer the friends, higher the level of dependence. That is the psychology of finance.” He means, those that chase numbers on social media i.e. focus more on the number of friends, are likely to have lesser number of people they can depend on in times of a financial crisis. Although it has not been scientifically proven, Mr Kale is of the opinion that if your friends on social media have bad credit ratings and make poor financial choices, then you tend to follow them down the same path. 
 
Any person assessing an application for loans or credit cards would also take a look at the applicant’s payment history on utility bills. They are looking at this data to determine whether a person has defaulted on such bills or has an outstanding dues for the last 6 months. Mr Kale’s advice for those wanting to be good borrowers and maintain a decent credit rating is never default on any utility bill payments. One way to ensure this is to setup up automated debits for all utility bill payments. 
 
 
He also discussed the need of a credit card and whether it is truly essential for any particular person. His advice if a person wants to opt for a credit card, is to stick with just one credit card rather than having multiple cards. The assessor when considering your application will take the combined max limit of all your cards under assessment. Regardless of whether the person under consideration uses all cards to the max, the assessor will assume the max limit is reached on all cards every month and this in turn puts the applicant at a disadvantage
 
Furthermore, the limit on a credit card should be no more than 3 months expenditure of the cardholder. It is important to note, that this expenditure is not the salary of a person but is rather the total expenses a person incurs over a period of 3 months. Mr Kale suggests that a person should consider the first month as the average usage amount on a card, the second month as the outstanding amount to be paid and the third month should be used as a buffer. A person should also try their best to pay EMIs of other loans through their credit cards. This way your CIBIL score will be reinforced from both sides - your loan and your credit card.
 
 
During his talk, Mr Kale also discussed several other factors that affect a personal credit assessment and also discussed the method of choosing an appropriate financial institution when considering to borrow. Among the factors discussed were age, the current inflation rate and the rate of interest offered by a particular institution. There are also other fringe factors that are considered such as the presence or absence of medical insurance, profession of the applicant, family backing etc. which are then consolidated down into a single score. This score allows the assessor to determine whether the applicant would be able to repay the loan in the given amount of time.  
 
 
Mr Kale explained the finer details of the borrowing process during his talk, which are too immense to be covered in their entirety in this report. Readers can watch the video of the session on our YouTube channel https://www.youtube.com/user/MoneylifeTV/) for more in depth tips
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