Ameya is 25 year old who has been working for a Mumbai headquartered MNC for the past one year. He wants to take his parents on holiday that will cost him around Rs 50,000. He has just taken a credit card with a card limit of Rs 75,000. Should he put on the expenses on his credit card and take his family out on a dream holiday or should he save up over the year and then take the trip?
He should take the holiday and come back and pay his credit card loan
He should save money for at least a year and then take his family out on their dream holiday.
Ans. B. He should save money for at least a year and then take his family out on their dream holiday. It would serve Ameya well to save up for at least a year before he takes the trip. If he uses his credit card to pay for the trip he would not only be under a lot of pressure to repay the credit card outstanding, his credit utilization would shoot up to 75%, thereby bringing down his CIBIL score. Ideally, credit utilization should never exceed the range of 30-40%. This helps an individual to maintain a good CIBIL score.
Girish is 28 years old and wants to buy his own car. But when he applied for a car loan his car loan application got rejected, because he has bad credit profile and CIBIL score of 680 on account of an unpaid student loan. Does the bank have the right to reject his loan application?
Ans. A. Yes. The bank has the right to reject Girish’s application because his CIBIL score is below the satisfactory level of 750. A common mistake youngsters are often known make is taking the repayment of their higher education loans lightly. If you have taken a student loan, make sure you pay it off in full as you go on to join your first job. Your student loan is a great opportunity to build credit and give you a head start on a good CIBIL score, so ensure you make regular payments on it to repay it ahead of schedule if you can.
Ashish has taken a gold loan of Rs 50,000 at the rate of 11% and has an outstanding balance of Rs 1 lakh on his credit card which is charging him a rate of 2.5% per annum. Which loan should he repay first?
Credit card loan
Ans. B. Credit card loan. Though a 2.5% interest rate sounds cheaper on his credit card per month, it works out to an annual rate of interest of over 30% for Ashish. Since he is paying a higher rate of interest on his credit card, Ashish should pay off the outstanding amount on his credit card as soon as he can.
Ali has just begun his job with Rs 35,000 per month is unable to decide what he should do first buy an individual life insurance cover or invest in mutual funds (MFs). What should he do?
Buy insurance first
Buy MFs first
Should do both simultaneously
Ans. C. Should do both simultaneously. Ali should asses his insurance needs first and since he does not have any dependents, he can go in for a pure life insurance policy like an online term plan that will work out to be cheap. He can simultaneously invest in a MF systematic investment plan (SIP) with as less as Rs 500 in a month which will help him inculcate financial discipline and augment his savings in the long run.
Karunesh earns around Rs 40,000 in a month, but each month his expenses are overshooting his income. What should he do?
Make a budget
Keep spending on his credit card
Ans. a. Make a budget. Clearly Karunesh has a problem with his spending pattern, and the constant usage of his credit card will get him into further debt. He should thus make a budget and chalk out a financial plan immediately with professional help. A professionally chalked out financial plan will help him regulate his expenses and build up his savings.
If you have answered all five of these questions correctly, you are indeed a financial whiz, and have your head above your shoulders, but if your score is three and below, you need to go back to the drawing board. Make a monthly budget to begin with and move on to make a long term financial plan. Your job does not end with making a financial plan. You must review it periodically and make changes in it according to the life stage that you are in. Maintaining financial discipline will help you maintain your financial health and maintain a good CIBIL score too.
The author is Co-Founder & Director, CreditVidya.