Credit Resolutions for 2021

It is a new year. And A new year brings new resolutions. Let us look at some of the credit resolutions for 2021 you can consider.

# 1 Reduce Debt

This applies to those who are currently struggling with credit burden. There are only two ways to reduce credit burden.

  1. Reduce the quantum of debt (Possible through repayments or prepayments)
  2. Reduce the cost of debt (balance transfer, taking a low-cost loan to square off a more expensive loan).

You can use a mix of the two approaches too. There is no other way to reduce credit burden. If you are juggling between multiple debt, you can use one of the debt management techniques to reduce debt.

#2 Borrow Responsibly

This applies to everyone. Do not borrow more than you can comfortably repay. “Comfortable” is slightly subjective. You may easily be able to repay EMIs today but not in case of a salary cut or a job loss. Grant yourself some cushion. Do not borrow the maximum you can. And things will go wrong. Keep an adequate emergency buffer to tide over short term cashflow gaps. Moreover, it is not just about “How much you borrow?”. It is also about “What you borrow for?”

Not everyone thinks alike. Some of us might attach greater value to physical possessions while the others might value experiences more. Hence, it is improper for me to comment on what constitutes a creditworthy spend. You are the best judge.

I am not too much in favour of taking credit for lifestyle related expenses (expensive gadgets, vacations etc). I would rather pay directly from my bank account. Or I spend on my credit card and then pay in full in the next billing cycle. But that’s my opinion. You might think differently.

Do not go overboard. Be responsible. Exercise discretion. With easy access to credit, there might be a tendency to overspend. Resist those urges.

#3 Pay Credit Card Bills in Full

A credit card is the most convenient and the quickest way to access credit. It is revolving credit. i.e., the credit limit replenishes once you pay off the debt. If you pay in full before the due date, you do not have to pay any interest either.

With other types of loans, you must apply. It takes some time before the fund reaches you. It is a one-time disbursal. You will have to pay interest too.

At the same time, credit card debt is the most expensive debt. If you do not pay in full, you will pay 36-45% p.a. in interest costs. And that is before penalties and service charges. Therefore, if you know before swiping your card that you may not be able to settle the bill in full in the next cycle, think twice before swiping your credit card. At least, do not use the credit card for expenses that are not really urgent.

Yes, most banks give you an option to convert credit card outstanding into relatively low-cost personal loans, but I would avoid such options for non-urgent expenses (again, that’s me).

#4 Not All Debt Is Bad

Do not go to the other extreme either. There are people who simply hate taking a loan or using a credit card. It is a good thing to do if you have the money in your bank account. However, not all of us have that luxury. Saving up may not always be an option for everyone. You may have to borrow to buy an asset or fund an expense.

Not all debt is bad. If you have taken a loan to buy an appreciating tangible asset (home loan) or an intangible asset (education loan), it is usually a fine choice, unless the cost or the debt is not excessive. The answer gets more subjective when you borrow for funding an avoidable or non-urgent expense. Use your judgement.

Sometimes, using your credit card can help you save money too. Remember instant discounts or No-cost EMIs. Instant discounts result in instant savings, while No-cost EMIs spread out the expense over a few months potentially increasing your affordability. I see nothing wrong in availing these options, provided you can pay on time and you do not end up buying things you can easily do without.

Never forget that these offers are nudges for you to spend. Be responsible.

#5 Check Your Credit Score Regularly

We have discussed earlier that your credit score not only affects your chances of getting credit but also the cost of credit. Hence, it is important that you keep an eye on your credit score, especially if you plan to take a loan in the future.

And now, you do not even have to pay anything to access your credit report. RBI has directed all Credit Information Companies (CICs) such as CIBIL to provide one free credit report each calendar year (January 1- December 31) to users.  I think that is a good enough frequency. You do not need to check your credit report daily.  Note that you can access 1 free credit report from each CIC per calendar year.

If there are discrepancies (incorrect reporting) in your credit report, take it up with the concerned bank and get it rectified. If your credit score is low for valid reasons, you must start working towards improving the score.

#6 Be Aware. Get Your Math Right

You are paying 8% p.a. on your home loan. Simply by requesting your bank, you can get the loan interest rate down to 7% p.a. This helps you save 20 EMIs. All you had to do was to ask the bank to change your loan benchmark. And you would ask only if you are aware.

You focused on the low interest rate but forgot about the heavy processing fee for a 6-month loan. If you had done the math, you would have gone with a slightly higher interest rate but low processing fee option. While evaluating loan options, consider the all-in cost and not just the interest rate cost. This requires you to spend some time but helps you save a lot of money.

Which credit resolution do you plan to add to your resolution list for 2021? Let us know in the comments section.

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