Planning a holiday and banking on your credit card for emergencies? Maybe it would make more sense to have another plan in place, or to simply check the credit limit on your card. If you are saying I know how much I can spend through my card, you may be in for a surprise.
Recently, there have been cases where banks have cut the credit limit on cards and even on the overdraft facility available with bank savings accounts.
Graphics: Yogesh Kumar / Mint
Blame the downturn?
Recent reports suggest that the global downturn has been the main reason why banks are aggressively decreasing their risk exposure. To reduce their risk quotient, banks do not want to give easy credit. In fact, banks the world over have taken action to reduce their credit to rebalance their exposure to credit default risk.
However, blaming the downturn is taking the easy way out. You need to relook at your own payment patterns to get to the real reason.
Your payment history plays a major role in determining credit card limits. A few late payments on a credit card or in repaying the overdraft amount in time are enough to trigger the alarm. Subrat Pani, head (credit cards), Kotak Mahindra Bank Ltd, says: “If we observe that a customer has failed to meet his obligations frequently, we could consider him as a potential risky customer and decrease his credit card limit.” This is, of course, done to reduce the bank’s exposure to potential defaults. Remember, a credit card, for the bank is an unsecured loan or a loan with no asset as collateral.
Being regular with your payments on a credit card or overdraft account of a particular bank is not enough any more. It’s important to maintain a good track record with all other banks you have a relationship with.
With credit scores being put in place, one borrowing can affect the other. Credit scores are based on your payment history of all the loans you may have taken till date.
Says Pani, “We rely on ‘portfolio review’, a product offered by Credit Information Bureau (India) Ltd, or Cibil.”
Says Arun Thukral, managing director, Cibil: “Portfolio review report is a tool we offer to banks. It helps them in identifying customers who could be potential defaulters. In other words, the tool lets the bank know how much risk they are taking by lending to a particular customer.”
The portfolio review is a monthly report that gives a comprehensive view of the particular customers credit relationship across multiple lenders. It gives the number of secured and unsecured loans a customer may have borrowed, the status of each loan account, overdue amounts, if any, and the number of days a customer may have defaulted on the loan.
This means that your credit card lender would know about the car loan you may have taken from another bank. So if you’ve been making timely payments on your credit card, but have goofed up on your car loan payments, you are in for trouble.
Too many loans
That’s not all. Apart from being regular on every loan, you have to keep your borrowing under control. In other words, taking too many loans is not a good idea.
Says Mumbai-based financial planner Suresh Sadagopan: “If 60% of one’s salary is going as loan dues, the person is in danger zone. Individuals with very high incomes can afford to pay 60% of their salaries in loans, but an average individual should never have more than 40-50% of his salary as loans.”
If you have borrowed more than what you can comfortably pay back, the banks would automatically assume that giving more credit to you could be risky.
“Though this is a laggard indicator, it’s always riskier for banks to lend to customers who borrowed way too much than their repayment capacity,” says Pani.
Lack of use
It is possible that you fall under none of the above categories, but are still facing the same problem. Remember that banks can also withdraw the facility if they find that you are not regularly using it.
They may simply assume that you don’t need that much credit. Also, banks need to set aside your credit limit amount in case you want to use it at any point of time and in a scenario where you are not using it, that money is lying idle and not earning any interest for them.
Credit report check
For all you know, there could be mistakes in your credit report. Remember that simply paying off the dues does not mean that the loan is closed. Check if you appear as a defaulter on loans that have been paid off, but haven’t been formally closed. If you don’t have your score already, get it as soon as possible.
Last, but not the least, cases of fraud are becoming common these days and there is merit in checking out that aspect, too.
If banks are deliberately keeping you on a low credit diet, it’s about time to get a financial checkup.