Are there any advantages in becoming a priority banking customer?

Being a “priority banking customer” as the title suggests is being eligible for premium or special services from your bank.  While the idea of being eligible for premium banking services is no doubt appealing, it can at time come with associated charges. So, it is good to understand the general scope of priority banking services that are offered by almost all leading banks in India.  

“Priority Banking Services” are premium services offered by banks to their customers who match their eligibility criteria in terms of level of transactions on their banking accounts, banking accounts balance, and/or number of years of association with the bank. Banks offer several additional services to retain and maintain relationship with their old high net worth customers, who can potentially offer incremental profitable business to the bank.  

Some (indicative list) of the common services/facilities provided to priority banking customers are:

1.  Premium credit cards or debt cards free of cost

2.  Zero charges on RTGS and NEFT transactions via online banking.

3.  Cheque pick-up facility.

4.  Zero charges on balance enquiries.

5.  No charges on cash withdrawals when you transact on other bank ATM in India.

6.  Completely free Cheque book payable at any bank branch in India.

7.  Concessions in locker rent

8.  Free Demand Drafts

9.  Access to exclusive lounges and other areas

10. Exclusive Relationship manager

So as you would understand, many of the above benefits are small convenience based facilities and do not offer any significant benefit to the banking customer.

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Obviously, where banks offer priority banking services free of cost, there is no harm in accepting the offer However, in several cases, a bank expects the customer to maintain high minimum amount balance in his account or pay additional annual fees to avail priority banking services.

Further, while there might not be any annual fees, one needs to be careful as what services are offered free of cost of under priority banking services as the banks may still be charging customers for some services.

One also needs to understand, that with the advent of ATMs, online and mobile banking, a rapidly growing section of regular banking customers have limited requirement for facilities such as Cheque pickups, demand drafts or a need to make branch visits quite often. Anyhow, for a large majority of customers, banking needs are basic and limited to depositing and withdrawing money with occasional requirement of a demand draft.

Hence, for these customers, becoming a priority banking customer by paying annual charges or keeping higher account balances may not make any financial sense. Priority banking services may appeal for banking customers who are not technological savvy and have a high dependence on banking to meet their business requirements such as bulk Cheque or cash deposits, cash management services and frequent requirement to make demand drafts.

It is for these customers, the additional services/features that come with priority banking may hold potential value. If you are one of the high usage banking customers, you can surely look at priority banking services to avail the extra comfort that come along. However, do remember to assess your banking requirements and do a cost benefit analysis of availing priority banking services.

Everything You Need to Know About Credit Score

What is Credit Score?

Credit score is a composite score calculated on a scale that ranges from mid-300’s to mid-800 on the FICO scale on the basis of the credit profile of the person as describe below.

1. Your Past Payment Record: - your consistency of making payments on loans and credit cards probably determines more than 90% of your credit score. Key factors that tend to be taken into account are:

a) What is your past payment record.

b) Every missed or delayed payment may lead to a lower score.

c) Recent history (Upto 2 years) has a greater impact on your score.

d) Consistent repayment record tends to improve your score over a period of time.

2. Nature of credit availed by you:

a) Higher reliance on unsecured loans such as personal loan and credit cards may lead to negative impact on your score

b) Credit card usage in excess of about 30- 40% of credit limit tends to pull down the score, more so if this is combined with revolving credit on multiple cards

3. Hard inquiries:

a) Too much loan related inquiries in the past are seen as a sign of a person badly in need of loans. This is sometimes referred to as a “credit hungry” profile. This may impact your score negatively.

What is a good credit score?

It’s more about keeping your score healthy rather than it being good or bad. It is often found that banks tends to give loan at lower interest rates and more attractive terms to those who have a credit score of more than 675. Lower scores will tend to make your mortgage and auto loan more expensive.

Main reasons for a low credit score:

There may be many reasons for a low credit score. They are classified into two main categories:

1. Low scores due to bank error

a) Errors in credit information provided by banks to credit bureaus

b) Identity theft or identity fraud where some unauthorized person has availed credit using your profile

2. Low score due to irregular past payment behaviour

a) Missed or delayed loan payments

b) Too much loan applications made in the recent past

d) High credit card dues.

Useful tips to improve your credit score:

a) Make all your monthly payments against loans on time

b) Keep away from too many credit cards. Don’t miss credit card payments.  Even if you find it difficult to pay the entire bill, make sure you pay at least the minimum due amount.

c) Moderate use of unsecured credit lines such as credit card and personal loan

Main Reasons to Choose a Top up Loan as Against a Personal Loan

Suppose you have recently taken a loan and after some time period (say 1 year), you again need some money for another purpose. Now what you do? Obviously, you can go for another loan.

But, do you know that there is another faster way to get a loan easily in case if you have a home loan which is already running? This loan is known as Top up loan. The benefit is that you can get this at a lower interest rate compared to a personal loan.

How Top up Loan Works?

When you take a home loan interest rates, you mortgage your property and the bank allows you to take a loan Upto 75 – 85% of the property value subject to your ability to pay EMI on that amount. After you make some EMI payments, the outstanding principal on the original home loan comes down and in some cases, even the property would appreciate.

Hence, the loan to value (LTV) comes below the maximum threshold of the bank.  Over a period of time, even your salary may have grown at 5- 10% per annum and hence you are now eligible for a higher loan amount.

So, at this time, you are eligible for a Top up loan. According to banks policies you are eligible for a Top up loan after paying 12 months EMI on the previous loan. Most banks offer top up loans at either the home loan rate or Upto 1% higher than home loan rate, which is still 2-3% lower than a personal loan.

Important things which you need to know about Top up loan:

1. Tax Benefit:

In Top up loan, you will get the tax benefit only when the loan amount is used for buying the home or if you use it for construction or renovation purpose.

2. No Security Required:

In Top up loan, you need not mortgage any further asset to the bank. This is because the bank is giving you top up loan on the security of your existing home which is mortgaged with the bank and all your property documents are already with the bank. Note that if you close your home loan, you also need to close your Top up loan.

                                                           

3. Processing fees:

Nearly all the major banks charge some processing fees of 0.25% to 1% on top up loans. You can sometimes get lower rates of interest and lower processing fees by opting to transfer your home loan to another bank.

4. Top up loan amount:

In Top up loan, loan amount cannot exceed 75% of the value of the property (together with the home loan) and the original home loan amount which you had taken earlier.

5. Loan tenure:

While personal loans are available for a period Upto 5 years, top up loan can be Upto 15 years, resulting in lower EMI’s.  Also, floating rate top up loans are exempt from prepayment charges unlike personal loans where you need to pay high charges for prepayment.

Is Top up Loan Good Alternative to Personal Loan?

In most cases, a top up loan is better than a personal loan. You chances of getting a Top up loan are high if you have already taken a home loan and your repayment record is good.