Today a number of financial instruments are available to help us realise our dreams. Availing a loan i.e. personal loan, home loan, car loan etc. is commonplace to help achieve one’s ambitions. People also turn to credit cards for immediate expenses, such as shopping; this is nothing but a form of the loan itself. The fact is that financial companies market credit cards and loans as an easy solution to meet financial expenses. As a result, people end up applying for all possible means of loans, often simultaneously. A common complaint then is that the credit requests are rejected by the bank. Be careful to know the nitty-gritties of how loans function, to be able to avail a credit card and loan at the same time.
How do Banks Decide Loan Disbursement?
Banks follow the simple logic- loan value should not exceed repayment capacity of the borrower. For this purpose, banks refer to various information about the borrower:
- Credit worthiness of the loan applicant: This is available in the CIBIL credit history, as represented by the CIBIL score and the Credit Information Report. Your CIBIL score is based on factors such as credit history, payments history etc.
- Current credit exposure: Card and loan issuers analyze the number and amount of existing loan outflows that an individual has. If a person is servicing several loan outflows, there is higher chance that the bank will reject the loan or credit card request.
- Number of balance transfers: Borrowers who have a history of several balance transfers on their previous outstanding loans or credit cards find it difficult to avail further credit.
- Number of inquiries: When a bank receives a credit application (loan or credit card), it carries out an “inquiry” into the borrower’s credit history. An inquiry is treated as a potential debt, which is not a great sign. Generally, the higher the number of inquiries, the lower are the chances of availing credit.
- Other factors: Age, income level (below a threshold) are other factors that may prevent a bank from issuing credit card or loan.
Is Credit Card a Type of Loan?
A credit card is an unsecured liability because you need not place a security deposit to avail a credit card. It is in fact, an open-ended loan. Which means that the borrower can borrow over and over, up to the credit limit. A credit card is thus, ultimately a form of loan itself.
Most other loans like home loans, car loans etc. are close-ended i.e. you cannot borrow again and again in a cycle. The unsecured nature of credit cards poses a risk to the lender, and offering two credits at a time i.e. loan and credit card means even higher risk.
Impact of Applying For Credit Card And Loan at The Same Time
Every time a bank receives a new credit card application or a loan application, it makes an inquiry into the borrower’s credit score. This means that applying simultaneously for a loan and credit card will raise two inquiries. A high number of inquiries indicates that the borrower is in need of significant amount of credit. This is considered a bad sign from the lender’s perspective and makes banks averse to lending to such an applicant. In fact, too many inquiries may lead the borrower’s credit score to drop a bit. Basically, lenders have questions about why the borrower is attempting to take on a lot debt at time.
How to Avail Credit Cards And Loans
It is not a good idea to apply for credit card and loan, several credit cards, or several loans at the same time. It makes the bank lose confidence in your ability to pay off debt. An ideal way is to apply for one instrument, pay off the debt installments regularly for a few months and then apply for the other. In the meanwhile, any credit rating that may have dipped will have bounced back up, thanks to your diligent payments.
So, while it is possible to apply for loan and credit card at the same time, it is not advisable. Play your debt-cards smartly and secure your financial position.