A common sense approach towards building a healthy credit history

Creating a healthy credit history is part of strong financial planning. So one’s endeavour should be to always build a strong credit history so that need-based loans can be easily obtained

Credit history is generally defined as the record of a borrower’s payment behavior that shows his or her ability to repay a loan. The significance of credit history lies in the fact that it acts an important parameter for sanctioning of loans by banks and financial institutions. A health credit history is in fact an intangible asset created by an individual which remains a life-long companion. In an era when credit bureaus are growing and influencing credit decisions of banks and financial institutions, it is important to maintain a healthy credit history. Even if we ignore the need for a good credit history exclusively for the purpose of borrowing, building a good credit history still remains important as credit behavior shows our approach towards managing our expenses and building strong financial base.

While building healthy credit history is important, equally important is to know how to build a healthy credit history. The following steps are extremely important in building healthy credit history which we must follow.

Cut your cloth according to your coat

This old saying can act as a panacea for overcoming any issue in credit history. The saying gives a very important message which is one should never borrow more than the ability to pay back the loan. People generally get tempted by offers which are given by banks and financial institutions in form of combo offers that are generally given at the time of borrowing of money.  In some cases people even manage to borrow beyond 50% of earning capacity by taking personal loans and loans on credit cards.

Though there is no general rule for what can be the maximum borrowing that an individual should do, one should try to make attempts in order to ensure that after paying EMIs (equated monthly instalments) sufficient funds are left to meet monthly expenses and also generate some amount of savings every month. The moment you stretch your borrowing limits to a unmanageable limit any adverse scenario can create a black spot in the credit history which is popularly called as ‘delinquency’ and is known as delayed payment in layman’s language. Logically speaking your borrowing limit should not exceed more than 40% of your net income.

Read about Credit Crossroads: The importance of maintaining a good credit score”, a seminar conducted by Moneylife Foundation

Have limited credit cards and ensure prudent usage of credit cards

Credit cards are a type of unsecured credit facility. These cards act as a very important reflection of our approach towards credit. It has been observed that credit cards often prompt individuals to spend more than what is desired. Having multiple credit cards is even more risky. You may end up spending on cards and rotate credit of one card to another. If credit cards are not used wisely, there is a risk of falling into debt trap. Also remember that once you have used your card, avoid any kind of delayed payment. Such behaviours are these days tracked by credit bureau and your ability to borrow may get reduced because of defaults in the credit card. Important things to remember with respect to credit cards are—optimize usage of cards, ensure that unused cards are cancelled and also ensure that any kinds of delay on credit card payments are avoided.


Credit history of your spouse can impact you too. Click here to learn more.


Check your credit history

It is suggested that every individual should check his/her credit history by obtaining credit reports from credit bureaus. The reports from credit bureau carry details of your credit history. Though the reports come at a cost, it makes sense to go for these reports. If anything adverse is found in the credit history, you should try to resolve the issue found in the credit history rather than ignoring such discrepancies. Also checking your own credit record helps you to avoid any last minute surprises which can come your way when you go and borrow money from a bank.


Never borrow for consumption, borrow only for asset creation

The golden rule for any borrowing is that borrowing should only be done for asset creation and not for personal consumption unless you have substantial disposable income. This is also a lesson to avoid impulsive buying. These days people often carried away by demonstration effect and end up spending more than what is desired. Many times such expenses are made on a credit card, which should be avoided at all stages. This will help create as healthy credit history as you will not have any undesirable credit transaction happening in your credit record.

Creating a healthy credit history is part of strong financial planning. So one’s endeavour should be to always build a strong credit history so that need-based loans can be easily obtained.

Read many other articles related to credit history and credit score, here.

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)


Rules, rules everywhere, not a rule where needed

If there were a definite set of rules, duly framed as per the legal provisions, there would have been much lesser chances of such huge discrepancies and anomalies involved in the transfer of IAS/IPS officers

This is not a travel diary of a police officer but they are the details of my postings during 2006-07. Eight postings in two years and one can easily understand the various accompanied issues related with these transfers. My children, Tanaya and Aditya, had to get shifted from one school to another every few months and my wife Nutan got so fed up with this that she almost declared to live separately.

Hence, Ashok Khemka of the Robert Vadra fame is not the only officer who got 42 transfers in 21 years of service. I have a batch-mate in Uttar Pradesh who was posted to three places within three days—he remained on road all through running from one place of posting to another till he finally got settled to a district for the next few months.


What could be the reason for this? May I venture to say that the reason for such abrupt and rapid transfers has to do with the lack of definite rules in this regards. If there had been well-specified rules for transfer of IAS/IPS (Indian Administrative Service/Indian Police Service) officers after a definite time period, such a thing would not possibly have taken place.


I present another aspect of the way different conclusions are derived regarding the suitability of an IPS officer. In his case, in the meeting of the Selection Committee held at time A for promotion of IPS officers of his batch to next grade, the Selection Committee concluded that he was fit for promotion, saying—“Based on the service records of Mr X, he has been categorized in the Fit category.” But quite strangely, in the next meeting of the Selection Committee held at time B, the Selection Committee for the same post made a completely different conclusion that the applicant was not fit for promotion again basing on the same Service records. Thus, within a period of six months, this officer’s position changed from being fit for promotion to becoming unfit for promotion, while getting quite decent remarks in the Annual Confidential Records between this period. Two exactly opposite conclusions within a period of six months could be made possibly because of the lack of specific “Rules and Regulations” where adequate discretion has been granted to the Selection Committee. It is quite obvious that if there were a definite set of rules, duly framed as per the legal provisions, there would have been much lesser chances of such huge discrepancies and anomalies.


These issues related with the internal problems associated with these elite government services like IAS, IPS, etc have come into wider public discussion, giving perception of these All India Services being left at the mercy of the government of the day, after the case of senior IAS officer Ashok Khemka who was abruptly transferred as managing director, Haryana Seed Development Corporation, came into the limelight.


But even otherwise, these matters have always remained there and the time seems to have come when we have to give greater attention to end any discrepancy and discrimination related with the service conditions of these services.


Here I would like to dwell over the issue of there being no specific rules and/or regulations for promotion related to matters under the All India Services Act, 1951. Why is it so, we don’t know. It is just that it possibly missed the eyes of the policymakers. Yet, such small errata have the possibility of having extremely critical effects on any structured service.


Bureaucracy, as we all know, is characterized by hierarchical organization, delineated lines of authority in a fixed area of activity, action taken on the basis of and recorded in written rules, etc. Max Weber, the father of bureaucracy, believed that here rules are implemented by neutral officials and most importantly career advancement depends on technical qualifications judged by organization, not individuals. We can say that the basic requirement of a bureaucratic set-up is to have value neutrality, to have as pin-pointed rules as possible, to have as less discretion and scope for manoeuvring as one might and to impersonal atmosphere and conditions. As Max Weber and so many other administrative thinkers rightly perceived, any system can run with greatest efficiency only when there are more of rules and less of discretion. The lack of specific promotion rules for the All India Services (AIS) needs to be seen in this perspective.


AIS have been framed under Article 312 of the Constitution. Today there are three All India Services—the Indian Administrative Service (IAS), the Indian Police Service (IPS) and the Indian Forest Service (IFS). The cadre controlling authorities for these three services respectively are the ministry of personnel, public grievances & pensions, ministry of home affairs and ministry of environment and forest, Government of India.


In pursuance of Article 312, an All India Services Act, 1951, was promulgated to regulate the recruitment and the conditions of service of persons appointed to the AIS and as per Section 3(1) of this Act—“The central government may, after consultation with the governments of the states concerned (including the state of Jammu and Kashmir) and by notification in the Official Gazette make rules for the regulation of recruitment, and the conditions of service of persons appointed to an All India Service”.


A very large number of rules and regulations have been framed in pursuance of power conferred by sub-section (1) of Section 3 of the AIS Act, 1951. Some of these rules and regulations are common to the three All India Services, while there are other specific rules and regulations for each of these three AIS. Thus the central government has framed rules and regulations for all kinds of matters related with these services.


At the same time, there are no specific rules for promotion of these services. Instead the promotion of IAS, IPS and IFS officers is being regulated by three separate government guidelines passed by their cadre controlling ministries. The home ministry’s Letter No. 45020/11/97-IPS.II dated 15/1/1999 outlines, “Principles regarding promotion of the members of IPS in the state cadre”. It merely states, “In order to ensure uniformity of procedure in the matter of appointment and promotion to various grades in the Indian Police Service in all the state cadres in the country, it would be desirable to adhere to the revised guidelines and follow and impose stricter standards of selection as envisaged in the revised guidelines.” There are similar letters for the IAS (No. 20011/4/92-AIS-II dated 28/03/2000) issued by the ministry of personnel, public grievances & pensions; and for IFS (No. 20019/1/2000-IFS-II, dated 18/11/2002) by the ministry of environment and forests.


These guidelines do not have the legal sanctity under Section 3 of the All India Services Act. What is more noteworthy is that they also seem to be in contradiction to some of the rules already passed for these officers.  While rule 2(a) of the IAS Pay Rules, IPS Pay Rules and the IFS Pay Rules say that there shall be a benchmark score for promotion, these guidelines negate any such benchmark for promotion. These promotion guidelines still talk of Annual Confidential Reports (ACRs) as the basic inputs for assessment while ACRs have got replaced by Performance Appraisal Reports (PARs) since 2007. It needs to be noted that the basic concept of ACR and PAR are completely different. ACRs were by nature confidential documents while PAR is much more open and transparent. PAR is more concerned with performance appraisal than writing confidential report about the officer. Hence, with the change from judging performance through ACR to PAR, there possibly was a need to make suitable changes in the promotion guidelines as well.


The present guidelines also seem to have many provisions where the scope for discretion seems immense. The guidelines say—“Each committee should decide its own method and procedure for objective assessment of the suitability of the candidates” which naturally means that there is no uniformity in this regard. Similarly, the guidelines say—“The committee should consider ACRs for equal number of years in respect of all officers falling within the zone of consideration for assessing their suitability for promotion.” What this means is that the number of years for which the performance of the officers of the AIS need to be evaluated/considered has not been specified but has been left on the discretion of the Selection Committees. Similarly, the present guidelines say—“in the case of each officer, an overall grading should be given which will be either Fit or Unfit”. But these rules do not ask the Selection Committee to specify the reasons for coming to such a conclusion. This naturally gives scope to the Selection Committee to conclude in any particular manner it feels like. My personal opinion is that wherever there is discretion, it always has the possibility of being misused.


Recently I filed a petition (Petition No. 418 of 2012) in the Central Administrative Tribunal (CAT), Lucknow praying for framing definite promotion rules for these services and for eliminating such provisions in the guidelines which prima facie see to leave scope for discretion or are against the existing rules. I consider this a part of my small contribution towards a more transparent and accountable governance and a situation where rule of law actually prevails in its letter and spirit.


(Amitabh Thakur, an IPS officer from Uttar Pradesh, is also working in the field of transparency in governance)


Chidambaram wants specific proposals for general insurance business

Insurance industry representatives are pitching for de-tariffing of motor insurance, development of pricing mechanism for health insurance business and lowering of the MAT

New Delhi: Finance Minister P Chidambaram has asked general insurance companies to come up with specific proposals so that the government could take measures to increase penetration of non-life insurance business which is at present estimated at less than 1% of GDP, reports PTI.
"We will get back to the Ministry within the week with specific proposals for boosting general insurance," said the head of a public sector insurance company after the meeting of industry representatives with the Finance Minister.
To increase penetration of general insurance, Chidambaram has asked CEOs of public and private sector companies to provide suggestions for removing impediments that hamper growth of the sector, said an official release.
The industry representatives during the meeting raised various issues with regards to taxation, loss-making motor insurance business and health insurance, the public sector insurance company official said.
He added the Minister wants them to come up with specific proposals.
Among other things, the industry representatives pitched for de-tariffing of motor insurance, development of pricing mechanism for health insurance business and lowering of the Minimum Alternate Tax (MAT) on the sector.
"Our (general insurance) penetration rate is low. It is 0.7%. How do we improve it to average standard which is 1.5 to 4%? The road map is to be prepared by all of us," Financial Services Secretary DK Mittal told reporters after the meeting.
The basic agenda of today's meeting was to work out ways to increase penetration of non-life insurance and promote financial inclusion, Mittal added.
Chidambaram had earlier in the month held similar exercise with representatives of the life insurance industry with a view to boosting the sector.
The major challenge before the industry, Chidambaram said in his remarks, was to increase reach to maximum number of people along with growth of investment in the sector.
Later, talking to reporters, Bharti AXA General Insurance CEO Amarnath Ananthanarayanan said there was a general feeling that a lot is needed to be done to promote non-life insurance sector in the country.
Among other things, he said, low profitability was also hampering growth of general insurance business in the country.
"...things hindering the growth of insurance sector is lack of profitability among the general insurance companies," he said, adding the government would also need to pursue legislative changes which are awaiting Parliamentary approval.
The government's decision to raise foreign investment in insurance from 26 to 49% cannot be implemented without amendment to the Insurance Act. The amendment bill has been pending in Parliament since December 2008.
The general insurance industry is facing losses mainly due to high claims on third party motor insurance pool and high cost-to-claim ratio in the health insurance sector. The ratio was as high as 140% as on June 2012.
It was pointed out that motor vehicle insurance, which accounts for 41% share of non-life insurance business, faces major challenges because of regulated tariff, unlimited liability and non-jurisdiction restriction for filing claims.
The industry suggested de-tariffing of motor insurance and a cap on liabilities of insurers. Suggestions were also made for improving penetration of home insurance business.
Industry also requested for hike in service tax exemption limit and removal of TDS on payment of reinsurance premium by insurance companies.


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