The impact of delayed payments on CIBIL score

HSBC Bank is a bank I try to avoid as much as possible because their tech systems are buggy, and their stance arrogant. I came to this conclusion after their systems wrongly flagged my accounts twice, once in 2021 and again a different account in 2022.

I had closed an HSBC credit card in 2006. HSBC Bank lost track of some details about this card and started reporting this card as delinquent in 2021. For 15 years, they had forgotten about this card. In 2020, they even issued me a new credit card. But in 2021, they randomly decided that I hadn’t been paying my credit card bill for 15 years. This was purely because of HSBC Bank’s incompetence in record-keeping, but they pushed the blame onto me because they could. Incompetent, dishonest, and immoral: quite a combination.

I was naive back then, and I decided to pay the bank their ransom to mark this card as paid. I really should have complained to the RBI and shouldn’t have paid them a paisa. But I was ignorant, and just paid my way out of this headache.

But this so-called “delinquency” has been in my credit report ever since, and naturally, it was pulling my credit score down.

Back in September 2023, 2 years after I paid HSBC the ransom, my CIBIL credit score went from around 730 to around 760. A jump of 30 points right around the time when this “delinquency” was just over 2 years old. Now, in September 2024, the score has gone up by another 30 points since the “delinquency” is now more than 3 years old.

In fact, the report now shows that I have been paying my dues on time 100% of the time.

Why am I writing about this?

I am writing this post because I can now see that CIBIL only looks at repayment history of the past 3 years. It’s also nice to finally get a score that I deserve. I am amused, and I am sharing it with others. That’s pretty much it.

If your credit score is affected by something negative like this, be hopeful that eventually the negative remarks will stop impacting your score. But be aware that credit reporting agencies can change the rules at any time. They may change 3 years to 5 years (or 2 years) if that suits them. The score bump may not stay at 30 points per year—it may increase or decrease.

Credit reporting is a practice by lenders for lenders. They don’t care much about borrowers. I always recommend people to ignore credit scores and focus on what’s in their control. (I regularly review my credit report to see if there are unexpected entries there. But I don’t care too much about the score per se. Worrying about things not in our control is unproductive.)

Where to park emergency fund?

“Where to park my emergency fund?” is a question I see many people ask. This is also a question I was asking a few years back, but I did not get a satisfactory answer. In this post, I am going to write down my own answer to this question. My goal is not to give one single answer, but to give a matrix of options to choose from.

‘Emergency Fund’ by 401kcalculator.org • CC BY-SA 2.0 • flickr.com

a. Easy, transparent access

If you want the money to be accessible easily, without even having to consciously think about using the emergency corpus, add this as sweep deposit(s) to your primary account. If you run out of money in your bank account some day, your deposits will automatically liquidate to pay for your expenses.

Who is this good for?

• People who don’t want to think too much, but just want the safety of having an emergency fund.
• People who have family members who don’t want to (or cannot) think about drawing from different accounts or liquidating assets like mutual funds, fixed deposits, etc.

Maintenance strategy

Add the emergency cash to the primary bank account. Keep spending from that bank account without worrying whether you are drawing from the emergency fund or not. Every few months—say 6 or 12 months—review the surplus in the bank account + deposits. If it’s fallen below the amount you wanted to save, replenish it.

b. Easy, but non-transparent access

Open a separate bank account just for holding emergency fund. All cash in this account (including sweep deposits) is your emergency fund. This is a good option if you want the money to be accessible easily, but you want the use of the emergency fund to be a conscious decision.

Who is this good for?

• People who don’t want to accidentally dip into their emergency fund. For example, this is good if you want to know when all you had to access your emergency fund so you can make better financial plans.
• People with a “family emergency corpus” that anyone in the family can use. Open an either-or-survivor bank account in up to 3 family members’ names. Everyone uses their regular account for their day-to-day expenses. Anyone can use the joint account in emergencies.

Maintenance strategy

It’s very easy to tell how much money from the emergency fund has been used by just looking at the emergency account’s statement. Replenish the account as early as possible after every use (or periodically).

c. Harder to access, but more tax efficient

Interest paid to the money kept in banks is taxed every year irrespective of whether you used the interest or not. If you park the cash in mutual funds, you only pay tax if/when you use the money.

Using mutual funds is tax efficient, but the liquidity is severely limited compared to bank deposits. If you need a reasonably large sum at 4pm on a Friday, the earliest you can get access to cash is Tuesday! Or Wednesday if Monday happens to be a holiday.

Who is this good for?

• People who have other means to manage emergencies. For example, you are young and single, and you can ask your parents to lend you some cash.
• People who don’t like to manage bank deposits, such as calculating tax liability on realised + accrued interest.

Maintenance strategy

Same as option (b), but you also need a plan for (i) how you or your family members will redeem the mutual fund, and (ii) how you are going to manage the lag between placing a redemption order and getting cash in your bank account.

You can choose from a few mutual fund categories. Liquid funds are the safest; ultra short and money market funds are a tad bit riskier but may give about 0.5% more return. Gains from arbitrage funds are taxed even more favourably, but redemptions take 2 business days (vs 1 business day for debt funds).

Plug: Looking to open a new bank account with auto sweep-in and sweep-out? Check out my post Comparing auto-sweep accounts of 3 banks.

d. A corpus with 2 different buckets

There can be 2 kinds of emergencies.

1. The first category needs only a little bit of money, but you need it quickly. During the emergency, you may be preoccupied with more important things, and hence thinking about money then can be a hassle. Medical emergencies, a family member getting into an accident, a relative asking for an emergency loan, emergency car, house, appliance repair, etc are some examples.
2. The other category of emergencies needs a larger sum of money, but you’d need to spend it over a longer duration, say, a few months. Temporary loss of income is a typical example. In such cases, you usually have time to think and plan an asset liquidation strategy.

Let’s say you want to tackle these 2 kinds differently. You may want to optimise for liquidity and accessibility for the first kind and optimise for the highest return for the second kind. In this case, you can choose either (a) or (b) for the first part of your emergency corpus and (c) for the second part.

For the second part, it will be tempting to go with a hybrid mutual fund or a multi-asset mutual fund to potentially get a higher return. However, keep in mind that job losses often coincide with larger economic uncertainties. How would you feel if you lose your job right when your emergency corpus is down by 30% (because of the gloomy outlook in the market)?

Conclusion

The purpose of this post is to show a few solutions to inspire people to think of something that suits their needs and preferences. I hope that goal is accomplished. Everyone has unique needs. Make a plan that lets you feel the most comfortable, because living comfortably is the whole point of saving money.

Comparing auto-sweep accounts of 3 banks

I like bank accounts with automatic sweep-in and sweep-out functionality. When the saving account balance goes above a threshold, the excess is automatically made into a fixed deposit. When we overdraw from the saving account, fixed deposits are fully or partially liquidated to replenish the saving account.

People who want to optimise the interest they get from their deposits may not like this functionality. To optimise the return, one would want to choose the best yielding deposit duration at the time of opening the deposit and have control over which deposit is liquidated when money is needed. But I like this functionality for the simplicity it provides. I just ignore the deposits and use it like a saving account that pays a higher (but unpredictable) interest.

I have used this functionality at 3 different banks—Axis Bank, HDFC Bank, and Kotak Mahindra Bank. This post is to compare the 3. We’ll look at each bank in alphabetic order.

‘Deposit Account’ by Nick Youngson CC BY-SA 3.0 Pix4free.org

Axis Bank

Axis Bank calls this Auto Fixed Deposit. This can be enabled on any saving account.

The customer can choose the parameters such as the threshold at which new deposits will be created, duration of the deposits, and the frequency of deposit creation. The lowest allowed threshold is ₹25,000.

Their net and mobile banking apps have a UI to enable this functionality, but they did not work. (But that’s typical of Axis Bank—most of their tech solutions don’t work.) I had to give a written request at the branch to enable this. It appears I can now disable Auto Fixed Deposit from net banking, but it does not give the option to change the parameters. 

Net and mobile banking apps show the cumulative value of the account balance and connected fixed deposits everywhere. This makes it easy to see how much you can draw from the account. If you want to find out how much money is sitting in the saving account excluding fixed deposits, you need to manually calculate that.

HDFC Bank

HDFC Bank allows this functionality only in their Savings Max Account product. It appears that auto-sweep cannot be enabled on other account types such as salary accounts.

Configuration such as the balance threshold, deposit duration, and frequency of deposit creation are decided by the bank and the customer cannot tweak them. The threshold is set at ₹1,00,000, which is not too bad.

Since this functionality is available in only a specific account variant, you need to work with branch staff to avail this functionality.

Net and mobile banking apps show only the cash that’s in the saving account. Nowhere can you see how much you can draw from the account. You need to manually sum up the fixed deposit values and calculate that number if you need to know.

Kotak Mahindra Bank

Kotak Mahindra calls this ActivMoney. This can be enabled on any saving account.

Configuration such as the balance threshold, deposit duration, and frequency of deposit creation are decided by the bank and the customer cannot tweak them. But the threshold is set to ₹3,00,000 for their Privy League customers making this somewhat less appealing for their top-tier customers.

You can enable and disable this feature any time from their mobile app. It’s a simple toggle that you can turn on or off at any time.

Kotak Mahindra net and mobile banking apps try to show both balances—with and without factoring in the swept deposits—to give a clear picture of the customer’s holdings. But this also leads to a somewhat confusing experience of seeing different balances at different places. The customer needs to know whether the shown balance includes deposits or not as the bank doesn’t explicitly label that.

Realising that I don’t like bonds all that much

I have been thinking about debt/bond investment since April 2023, right after the Government of India decided to tax gains on debt mutual funds at the slab rate. I have been looking at “debt-like” investments that are taxed less, but I am not fully convinced by any one solution.

A few days ago, I wrote to my financial advisor asking for advice. Here is a copy-paste of what I wrote to him:

Maybe I am overreacting to the recent taxation change. But I have been finding it hard to invest in mutual funds that only hold bonds. Here are the alternative options I have been thinking about:

1. Possibly the simplest: choose a fund like Edelweiss Multi Asset fund for debt allocation. This fund holds 50% arbitrage and 50% bonds. The bond portfolio looks high quality (AAA and SOV only) with about 2 to 3 years duration.
2. Instead of investing in Indian equity and bonds separately, invest in the Quantum Multi Asset Allocation fund. This fund holds 40% (actively chosen) Indian equity; 10 to 15% gold; and the rest in bonds. The reason I like this fund more than option #1 is that (a) this fund maintains a longer duration bond portfolio, (b) gives me gold exposure, and (c) this can simplify my portfolio by removing a separate fund for Indian equity. The caveats are (a) I don’t know if I’ll be happy to live with a smaller, active equity portfolio for Indian equity and (b) rebalancing between asset classes will be more difficult.
3. A fund that invests in up to 65% bonds and 30 to 35% gold (and maybe silver) will be a good replacement for the debt fund in my portfolio. But such a fund does not exist in India. Is there any such overseas ETF?

Maybe I am overthinking this and impatient for a solution to appear too quickly? What is your advice for me? :)

Writing this out gave me some clarity. Fairly soon after I wrote this email, I understood one thing: I invest in debt mutual funds without conviction. I understand equity, and I know why I have equity in my portfolio. But I invest in debt because I was told that a good portfolio should hold bonds along with equity.

Back when tax rules changed in 2023, tax for global equity—that is, non-Indian equity—also went up significantly. My advisor recommended that I avoid making fresh investments in global equity. But I stood firm and continued to invest in global equity. (Now the tax rules have changed again, and global equity is taxed more favourably.)

I chose to stick with global equity despite high taxes because I knew what I was getting from global equity. Can I say the same thing about bonds? Probably not. It appears that I only understand things like “reduced volatility” and “negative correlation with equity” superficially, and deep down I don’t like any asset other than equity. (I also like gold despite my decision to not invest in gold. I still haven’t added gold back to my portfolio, but my desire for gold hasn’t disappeared.)

I suppose I need to answer some basic questions about what I do and don’t like. I think I don’t even know what the correct mix of growth and stability for my portfolio is. More learning and introspection can only lead me to a solution—a portfolio that I am comfortable holding despite taxation changes that keep happening.