How does my Payment History affect my credit score?

Payment History is the biggest component of your FICO credit score and it weighs for as much as 35% of the overall score. This is because lenders are most interested in knowing how have you handled debt and how timely have your repayments been.

What is interesting to note is that 60% of the credit reports do not show any late payments at all. Somehow there is a misconception among a lot of people that if they are paying off their debts in time then their credit report will be perfect. In fact, even if you have repaid all your debts on time, you are like 60% of the remaining population and will need to build on the other four aspects of your credit score to get a really awesome credit score.

What kind of bills are considered in my payment history?

  • Credit card payments like Visa and MasterCard
  • Retail store credit cards like Macy’s or Amazon
  • Installment loans like car loans where a periodic installment is made
  • Mortgage loans
  • Finance Company loans

Apart from late payment on the items listed above, there are some serious things that can really hamper your payment history. For example a bankruptcy can mar your credit report for as long as seven years. This is a list of events that will damage your payment history apart from the ones listed earlier:

  • Bankruptcies
  • Foreclosures
  • Suits
  • Wage attachments
  • Liens
  • Judgments

How is my credit history affected by a late payment or two?

What you want is a perfect payment history record but the FICO score looks at your overall payment track record and one or two late payments will not kill the rest of your score.

While calculating the penalty for late payments FICO considers three things – how long did you default the money for? (60 days is worse than 30), how much money did you default on? and how recent was it? (default that was done a week ago will affect you more than a year old default)

What if I have already defaulted on a payment?

If you have already defaulted on a payment then try and get on track as fast as possible. The best and only way to repair this is to keep paying bills on time and keep paying them for as long as you can.

Remember if you have defaulted on a bill, then paying it in full and then closing the account will not remove it from your record, it will still stay there.

You can even seek credit counseling if you are facing trouble repaying your debt. As far as your credit score goes, you will not be penalized for seeking credit counseling.

So there you have it, payment history is the biggest component of your credit score and is somewhat like a catcher. You catch 100 catches and you are still like the remaining 60% of your peers, but if you start missing a few then you are out of the leagues!

What are the components of my credit score?

Your credit score which is your FICO score is made up of five components. These five components have different weightage and together they form your credit score:

  • Payment History (35%): Payment history is your track record of paying your bills. This is the biggest part of your credit score and influences some 35% of your overall score. Credit card payments, bill payments, mortgages and delinquencies form part of this section. While its great to have all your bills paid on time, one or two late payments will not kill your score entirely. Basically three things are considered if there are any late payments. How much was owed? How recently was it owed? and  for how long was it owed?
  • Amounts owed(30%): The second most significant factor that determines your credit score is the amount that you owe. This takes into account the total credit that you can take and how much of that, you already have taken. Maxing out credit cards is a good example of an action that will lower your credit score. This shows that you have a much higher chance of defaulting than someone who still has a lot of balance left on their credit card.
  • Length of credit history(15%): The next most important thing that carries 15% of your total score is the length of your total credit history. The longer the better. So that means that as far as credit scores go, it is best to start building credit as early as possible and being responsible with it. If you do not have a lot of credit history then it is best not to get too many credit cards. If you open too many accounts then that will lower your average account age and push your credit score down.
  • New Credit(10%): This factor weighs 10% on your overall credit score. Opening a lot of new accounts in a short period of time increases the risk of default and this category shows that. Every time you apply to get a new credit card, an inquiry is made on your credit report and this reduces your credit score by a bit.
  • Types of credit used(10%): The last of these factors is the types of credit that you have. A healthy mix of a credit card, mortgage, financial loans, installment loans and retail accounts gives a picture of a good balanced financial planning. Its not necessary to have all these type of accounts to have a good score, but an account which is skewed towards credit cards will definitely have a lower score in this category when compared to an account with a healthy mix.

So there you have it, the factors that affect your credit score and in turn your ability to manage your finances and live better!

What types of brokerage account exist?

A brokerage account is the beginning of turning all your investments ideas into reality. You need a brokerage account in order to buy and sell stocks, mutual funds, ETFs and other assets.

There are two types of brokerage accounts – Traditional Full Service Accounts and Discount Brokerage Accounts.

  • Traditional brokerage: Traditional accounts charge you a higher fee and offer a lot more services, they guide you in every respect of financial planning and hand-hold you while you build your portfolio. The positive to this is that you will get professional guidance in building your portfolio and it will be easier for you to start off. You will have access to a personal adviser who will be easily available to you and this is very similar to personal financial planning. The flip side is that it will cost you a lot more and a lot of people do not think they are getting anything that they couldn’t have done themselves.
  • Discount Brokerage: Discount brokerages let you trade at a much lower fee and there is absolutely no hand-holding. This is the type of account that most people will find useful and practical. This is because your fee on trading is lower, the minimum single trade amounts are lower and the minimum balances that you need to keep in your accounts are also lower. On the flip side there is usually no access to a broker who can answer your questions and you will be trading online most of the time. So if you are looking for help along the way then you can research on your own based on the tools that the discount brokerage gives you but do not expect anything beyond that.

How do the oil prices affect the Rupee – Dollar exchange rate?

At the beginning of 2008 the Rupee rate went as high as 39 to a Dollar and at that time it didn’t look like it will be back to 43 so soon. Economists and Analysts were heralding this as a new era and were asking everyone to reconcile to the new realities of the market.

Just a few months down the line everything has changed. While there are many reasons that pushed the Rupee to 43 levels, perhaps the most unexpected was that oil prices went up to $143 a barrel.

India imports 70% of its oil needs and when the price of oil doubles, it makes a big dent on the country’s fiscal balances. The current account deficit has almost doubled from 2007 in terms of value, and has reached 1.5% of GDP, up from 1% of GDP last year.

Basically that means that to continue to fund India’s imports, the country needs to keep buying dollars and by doing that the value of the Dollar goes up while the value of the Rupee goes down.

High oil prices also mean that the oil companies need to buy Dollars in order to get hold of the expensive oil and further push down the Rupee value. In absolute terms every 10 dollar increase in the price of an oil barrel increases the current account deficit by roughly $6.5 billion dollars and this has to be funded by more dollars.

The RBI has sufficient dollar reserves to ease the pressure off the rupee decline, but the high levels of inflation do not allow it to buy off dollars in the open market as freely as it used to do earlier.

All these factors play out together and push the rupee value down, which is good for exporters but not so good for oil prices and the trade deficit.

Manshu Verma

What is an APR?

APR or Annual Percentage Rate is the total cost of the debt that you will have to pay annually. The difference between the APR and the interest rate that your credit card company charges you is that APR will also include other costs like annual fee, registration fee etc.

That is why the APR will be always higher than the interest rate that is being advertised. The US and UK law requires lenders to always publish the APR so that it helps consumers to make a fair comparison between two products. This is not possible just by looking at the rate of interest or the other fees alone.

Despite various efforts by regulators, there is no standard on what costs are included as part of APR and what costs do not form part of APR. And therefore it can be a bit in accurate to compare the APRs given by two companies. This link has got some good examples of the things generally covered, mostly covered and never covered.

One last thing to keep in mind is that while APR stands for Annual Percentage Rate it is most of the times simply monthly rate and not the annual rate. While the difference in the monthly and annual rates can be nominal, stretched over a period of 20 – 30 years it may make a significant difference.

What should I look for in a student credit card?

A student credit card is a credit card offered by a bank that is specially meant for students. Student credit cards are a great way to build credit history, as it is much easier to get a credit card while you are still a student as compared to later in life.

Few pointers that you need to keep in mind when applying for a student credit card:

    • No co-signor or minimum income needed: Many student credit cards will not need you to have a minimum income or a co-signor. Look for such a card if you are not working or don’t have some one to co-sign.
    • 0% APR for first six months: Many student credit cards will let you have 0% APR for the first six months or so. Make sure you get a card that has this feature.
    • Reward points for maintaining a good GPA: There are some student credit cards that will give you reward points for maintaining a good GPA. So look for one that will let you enjoy your high grades.
    • Reward points for timely payment: Some student credit cards will give you additional reward points just for paying on time. You need to look for this feature in your credit card.
    • No annual fee: Most student credit cards do not charge any annual fee but some still do, so make sure you get one which doesn’t charge an annual fee at all.
    • Reward points in general: Different student credit cards will have different reward point structure. Some will offer great rewards for shopping at a retail store while others give cash back if you buy gas from a particular gas station. Look for one that suits your needs.
      Needless to say that you must find one with a reasonable APR, after your introductory offer ends, so keep hunting for one with a low APR and a combination of the other factors mentioned above.

How can I start investing in stocks?

Starting investing in stocks can be a difficult task for a beginner. There are just so many things to think about and take care of that first time investors feel a little lost.

The questions that accompany investing in stocks can be broken down into operational issues like opening a brokerage account, frequency of trading, costs of trading etc. and then the investment philosophy itself. Your investment philosophy is has more to do with whether you are a value investor, growth investor, long term investor, short term trader etc.

For this post let’s look at the operational aspects and see what are the things that you need to take care of.

1. Mock trading: You really don’t want to jump into trading and investing with your real money up front. There are several websites that allow you to simulate trading with fake money. If you have never invested then this is a good way to start. has an excellent simulator that you can use.This will also give you time to get your investment technique in order and read up on the topic and get familiarized with it.

2. Opening a brokerage account: After you have fiddled around with fake money for a while you will need to open a brokerage account to get started with real money. A brokerage account is an account which lets you buy and sell stocks, mutual funds, ETFs and other assets. There are various types of brokerage accounts and they come with different type of fees, so you need to go through their terms and look for annoying little things like no activity fee and avoid such brokerages.

3. Start investing: Once you have a brokerage account and have funded it with money, you can start investing. Begin by putting in as little money as possible and get a feel of how the whole thing works. Look at the numbers that analysts talk about like EPS, P/E etc and read up on stuff like financial diversification, asset allocation, investing ideas from people like Warren Buffet and understand the concepts.

Don’t trade too frequently because this will jack up your costs considerably and make it very difficult for you to make any profits. Once you have the infrastructure set up for buying and selling stocks it is time to tune your investment strategy and develop a philosophy that will work for you.

How does a credit inquiry affect my credit score?

A credit inquiry means that a creditor, like a bank or a credit card company verifies your credit, by looking at your credit report and makes an “inquiry” of sorts.

There are two types of credit inquiries which are known as hard pulls and soft pulls.

What are soft pull credit inquiries?
Soft pulls do not impact your score at all and are usually done without your express consent. This basically translates into regular credit checks done by companies for lawful purposes. Some examples of soft pull credit inquiries:

  • Credit card company looking at your credit to send you a pre-approved offer
  • Background check done by an employer
  • Identity verification while opening a bank account
  • Regular checks done by your existing credit card company and bank to monitor unusual credit activity
  • You yourself requesting your credit report

Soft pull credit inquiries can’t be seen by other creditors on your credit report, but are visible to you. They do not impact your score in any way at all.

What are hard pull credit inquiries?

The credit inquiries to watch out for are known as hard pull credit inquiries. These inquiries take place when you give someone permission to view your score and they lower your score 5 to 6 points with every inquiry. (This is just an approximation)

So basically when you apply for that store credit card with zero annual fee and a low APR, you need to give them permission to verify your credit by making a credit inquiry to verify whether you are eligible or not.

Hard pull inquiries are also known as voluntary inquiries as they involve you volunteering your credit information to a credit card company, landlord, phone, cable, internet company etc.

The credit inquiry will be visible on your report for at least an year (usually two) and will impact your score by bringing it down by 5 to 6 points for a six month to one year period (this is just an approximation).

What is the rationale for this?

The thinking behind lowering your score because of a credit inquiry is that potential creditors view such credit inquiries in a slightly negative light. As a large number of these show a tendency towards taking a lot of credit and potentially overspending and going beyond your means.

What does it mean for you?

A lot of people apply for a credit card to get a $30 cash back or even a free game CD. This looks like a bargain because the rates are low and you seem to be getting something for nothing!

However now you know that is not the case and you will get your score lowered every time you apply for a new store card or something else. While one of these will not make a difference, have five or six on your report in a short time and then you will start noticing the difference in lender’s attitudes.

So don’t apply for every credit card that will give you ten bucks off on a DVD and be a little more restrained while applying for any new credit. In addition to that, stay safe by monitoring all 3 credit reports at a low monthly rate.

What is a CRR?

What is CRR?
Cash Reserve Ratio (CRR) is a percentage of deposits that banks must hold as cash reserves either with themselves or with the central bank.

For example if the CRR is 6% and a customers have deposited $100 with a bank, the bank should in turn hold cash reserves of $6. While most banks are allowed to keep this money as cash reserves, it is usually deposited with the central bank.

How is CRR used by central banks?
CRR is used as a monetary tool to contain inflation. When the central bank sees a situation of rampant inflation it raises the CRR to contain it. In effect raising the CRR means reducing the amount of money that a bank will have to lend out and thus decreasing money supply in the market.

This works out more potently than most of us imagine.

Imagine a situation where you deposit $100 in a bank, if the CRR is 10% then the bank can lend $90 to me and then I deposit $90, out of which 81 can be lent again, in the next round this will be 90% of 81 viz. 72.90 and so on and so forth. The total sum of all this is $900. So with $100 initial deposit and 10% CRR, the money supply created in the economy is $900.

Now if in the same situation the CRR is 20%, out of the initial $100 only $80 can be lent now and $64 in the next round and so on and so forth till the total lending is $400.

So a doubling of CRR leads to more than halving the money supply creation in the economy. That is why central banks raise the CRR whenever they face rising inflation.

When does raising CRR not work?

While CRR is a potent tool, it is not free from criticism. World over economists tend to think that open market operations which means that the central bank just goes out in the open market and buys up currency there is equally effective, if not more.

Raising CRR means that the banks raise the rate of interest at which they lend out funds to investors, so basically that translates into slowing down lending and economic activity and overall can translate into lower GDP growths.

What is a secured credit card?

A secured credit card is a card issued by a bank or a credit union which is fully secured by way of a deposit made by the card holder. So that means in order for you to get a secured credit card, you will need to make a deposit of say $300 with the bank and the bank will give you a credit card on which you can spend up to $300. This limit may be increased based on timely payments or improvement on your credit score.
In other cases this credit card may be linked to the bank account of the credit card holder. So in case the card holder defaults to pay on their credit card bill, the bank can simply deduct that amount from the bank account.

Secured credit cards are a very good way to start building your credit history or repair your damaged credit. Another way of putting it is that if you are not getting a credit card anywhere else, try this out.

Most banks and credit unions issue secured credit cards and you can check with them for the rates they offer to decide which one you should get.

There will always be an annual fee for a secured credit card but some of them do not need an application fee. So find one that doesn’t need you to pay an application fee.