I have three credit cards. I have always maintained proper repayment track. Most occasions, I make 100 per cent payment of the credit card bills. While I regularly use 50 per cent of the credit card limits, my CIBIL rating is stuck at 680. I have a running personal loan whose repayment is also perfectly on track. What should I do to improve my CIBIL rating?
-- Sirajuddin, New Delhi
I agree with you that 680 is not a very good score to go by. It may not be a bad score but does not qualify you for a loan automatically, for instance. So it may be worth your while to try and improve it. You may take the following steps:
1) Don't live much on credit: Swipe card, pay later, policy indicates credit hungry behavior which affects the credit rating of the individuals. At any point, one should not have more than two credit cards and two loans.
2) Use credit cards responsibly: It is advisable to use only 30-40 per cent of your credit card limit every month. If you have more expenditure than that, it is strongly advised to increase your credit limit.
3) Verify credit report and check errors: While you might think you have a good credit history, there might be certain reporting errors that are unnecessarily dragging your score down. Get your CIBIL report generated, go through it carefully and see where’s the issue. Then interact with the concerned agency to sort out the reporting error.
What are the credit-risk funds and how much return do they yield in comparison to bank FDs? Is it advisable to invest in them?
-- Surender Gupta, Lucknow
Credit-risk funds are debt funds which have at least 65 per cent of their investments in less than AA-rated paper (i.e, bonds, debentures etc). These funds typically have the potential to give 2-3 per cent higher returns compared to risk-free papers, which they do by taking higher risk by investing in lower-rated papers. Since such papers have lower credit rating assigned to them, they offer higher interest rates to market themselves. In case their ratings get upgraded (which is what the fund manager does his due diligence for beforehand), their prices in the open market move up and hence, they have the potential to offer the benefit of capital gains. Conversely, however, if their ratings fall, they might suffer capital gain losses.
They have some liquidity risk too. In case of any downgrade/default by the company, it may be difficult for the fund manager holding that paper to exit the holdings. Although it is a debt fund, it comes with this higher risk. An investor looking for steady income and low risk should generally stay away from these funds. If you are willing to take the extra risk to earn extra returns, you may consider investing in these schemes.