Personal Loans & Credit Cards- Now Harder to get!

With the Credit Bureau going live this week,it is going be harder for individuals to get loans and credit cards. There are 49 Banks that have subscribed to the Bureau’s service in UAE. The Credit Bureau report will include information on individual’s debt obligations and payment behavior.

What has changed?

Banks will still follow the Central Bank’s norm of lending to customers with a debt to income ratio of 50%. Where as earlier Banks only had access to Information reflected in customer application form and his bank statement, now they will have access to all his debt obligations whether or not these reflect in the Bank Statement. So all the hidden debts/ Cards that affect the Debt- Income ratio will now become known.

Who does this affect?

The new Credit Reports will affect two sets of Individuals:
  1. Those who have multiple Loans and Cards but these do not reflect on their bank statement. As all debt details become available to Banks, if an individual’s debt- Income ratio exceeds 50% he would be declined any further loan
  2. Those who have multiple lines of unutilized credit. Unutilized credit can be lying with an individual in the form of excessive Credit Limits on Cards or even credit line on Salary accounts or as equity release loans. A total of all loans and even utilized credit issued to an individual is considered in computing the Debt- income ratio and can affect the amount of loan issued to him. This factor can even affect people with high disposable income.

 Real Life scenario: 

 

Monthly Salary

50,000

Financial Outstanding

 Outstanding Amount

Minimum Monthly Payment

AMOUNT considered in DEBT- INCOME Ratio

EMI on Home Loan

10000

10000

10000

EMI on Personal Loan

5000

5000

5000

Credit Card Outstanding

20000

1000

0

Combined Credit Limit of all Credit Cards

200000

 

10000

 

 

16000

25000

 

Debt/Income Ratio: 25000/ 50000 i.e. 50%, this ratio is high as the amount considered in Debt- Income ratio is 5% of Total Combined Limit of all Cards issued to him. Hence a customer who still has AED 34,000 as disposable income cannot be issued even a Car Loan (which is secured), as his debt- income ratio is already 50% even though his monthly payments are much lesser than 50% of his monthly salary,
 
How to improve the Credit Report?
 
Close all Extra Credit Cards. Close any credit card that you seldom use and try to consolidate all Card Outstanding’s in 2 Cards. This process also called Balance Transfer will also help you save interest. In addition to that Consolidating all high interest loans and Cards to single Loan is also a great way to save interest cost. Bring down your interest cost from 36% p.a to 6% p.a. with Debt Consolidation and also improve your Credit Report.
 
Improve Payment Track Record. Maintain a regular payment track record on your debts. Be sure to always pay up the minimum balance due on the Credit Card and EMI before due date. This boosts your credit score.
 
Avoid & Resolve any disputes. Close any disputes with Banks on a credit card or a loan. While its all right to have a dispute with a Bank regarding any fees/ charges or even late payments, one should aim to revolve these as soon as possible. If a customer already knows that he won’t be able to pay the upcoming installment he should get in touch with his Bank and apply for a deferment if possible. If a deferment is not possible he should agree for a reasonable date for payment so that it is not noted as a miss on his report.
 
Follow this column to read more tips on improving your credit report.
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