The famous saying from John Beckley is true to the core to your financial life “most people do not plan to fail, they fail to plan”. While one creates a plan the same gets limited to budgeting, allocation and assignment of expected funds. One is unable to plan for something which is unknown and unforeseen. Since credit forms an integral part of any one’s financial life today, it is as important to have a plan for credit as much as one would have it for house hold expenses, education, investments etc.
Now how would one create a plan for credit over next five years? Following are the factors that you would be required to take into consideration while creating one for yourself. Please note that these are not listed in order of importance and each one of them is equally important.
Identify the needs
Identification of needs that would need funding is critical to this exercise. In case you are planning to buy a car or a house or any other large expense like marriage, overseas vacation, then it becomes even more important since these would require the substantial amount of funding and will impact on the monthly outflow grossly.
Amount of credit
Create a list of all large ticket expenses that you assume to undertake over next five years. Assigning a cap of expense on all of these will also be required. Say you are planning your child’s marriage and envisage an expense of Rs 25 lakh. You currently have Rs 7 lakhs in your savings and are planning to save another Rs 3 lakh in next 3 years before the marriage happens, then you would need to pick up a loan of 15 lakh to meet the expenses. Will you be able to afford the EMI from your monthly budget? If yes, then it is not the concern, but if it looks stretched then you may be required to rework on the limits that you would assign on an expense.
Check your current obligations
This will be a critical exercise to undertake in your planning. Make a list of all your current obligations and see which are the ones that would get completely paid within next 5 years or before you take credit for a large ticket spend. What you also need to work upon is the feasibility of repaying and closing few or all of these loans from your current income. In case you are able to work that out it will help you release pressure on further curtailing your monthly expenses when the large ticket loan is picked up. It will also help in better management of your debt income ratio. A lower debt income ratio will help in the speedy decision of your loan application.
Ensure timely re-payment
Again, another important factor is that you must not miss the date of repayment on any of your existing loan. Missing out on EMIs and delays in due date will only lead to the low CIBIL score. This can severely jeopardize your access to credit and leave you struggling to arrange funds.
Prepare for incremental expense
There is a big possibility that the cost of the expense would go up by the time you actually execute it. So you would need to plan for incremental costs while planning for same. You should calculate with an incremental 5% price per year at the least to arrive at the right amount calculation.
High exposure on credit cards
Credit cards are a reality of life today. In case you use credit cards regularly and have high exposure, then bring down the outstanding amounts. Please be aware that credit on cards is fairly expensive and you should only be spending what you can repay completely on the billing cycle. It is advised that you should not be using the card more than 40% of the assigned credit limit at any point in time. A higher usage of credit limit will only impact your CIBIL score calculation and can lead to challenges while you apply for a loan.
Regularly check credit reports
Check your credit reports regularly. You are entitled to a free credit report from the bureaus now so exercise the option. Do check out for anomalies and errors since these are quite common and can gravely impact your credit score.
Plan well and execute well. Keep a tap on all your expenses and savings that you wish to do for these large expenses.
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