Life on a line of credit

Even before the first salary is credited, there is an EMI to be paid

Imagine applying for a home loan and being told that the papers have been rejected because you defaulted on a credit card payment a few years back. Well, it happens to many people.

Credit history of an individual is slowly becoming an important tool at the hands of banks, housing finance companies and others to accept or reject loan applications. If you have erred in the past, it shows up in the Cibil and other credit reports. Keeping a clean credit history, therefore, is of prime importance.

With the age of acquiring the first loan coming down fast, the chances of default are many. Earlier, the first loan used to be a car or personal loan, and for some home loans, when they were in their late 30s or early 40s.

Now, it starts from education loan. In other words, even before the first salary has been credited, there is an equated monthly instalment (EMI). And a little recklessness in repayment can cause damage to credit history. So, if you have defaulted, try to set it right as soon as possible. Simple steps like approaching the bank or financial institution for moratorium or an extended settlement period when there is a cash crunch helps. Some banks may allow you to consolidate the debt, if you have more than one loan. You can also work with debt counselling agencies which can offer advice on how to restructure your debt.

Affirmative action on your part may help in convincing lenders that you are not a habitual defaulter and payments missed in the past were due to things beyond your control. According to Mohan Jayaraman, managing director, Experian Credit Information Company of India, most banks disregard past defaults, if it is followed by 18 months of good behaviour.

If it is not possible to reschedule the repayment of an unsecured loan, like a credit card or a personal loan, you can opt to finance it using a secured loan like a loan against a fixed deposit. After that you have to show 12 months of good credit behaviour to improve your credit score.

Remember that delinquency on unsecured loans is treated more adversely than secured credit. The rationale behind is that in case of a secured loan, the ability of the bank to recover and ensure closure of the loan is higher. But this is not the case with an unsecured loan. If you have defaulted on a credit card and are finding it tough to get another credit card, you can opt for a credit card linked to fixed deposits (FDs), which are offered by some banks. For the bank the FD allows the comfort to give you a card despite your past defaults and for you the card gives a chance to demonstrate good credit behaviour, Jayaraman points out.