You want to buy a brand new gadget, but you don’t have enough money. A friend tells you about new-age fintech lenders. You approach one and your loan gets sanctioned.
Access to credit has never been this easy for millenials. But do you understand the consequences of late payments? If, for some reason, you fail to make repayments by the due date, it will ding your credit score. In fact, banks may deny you home or car loan later in your life due to your bad credit history. So, while fintech players may let you have a credit line easily, make sure you resort to it only in emergency. Although it does help you build a credit history early in life, make sure living on debt does not become a habit.
Sathya Kalyanasundaram, Country Head and Managing Director, Experian India says the age group of 25 years and below has a higher risk of default compared to others. So, if you are a young millennial considering a fintech loan or already have it, you must understand nuances of credit score and how to maintain a decent score. Read on to know all about it:
A three-digit credit score indicates an individual’s creditworthiness, intent and ability to pay back money taken on credit. The score typically ranges from 300 to 900, 900 being the highest. The higher the credit score, the greater the chances are of the lenders approving the loan application. Kalyanasundaram of Experian says your credit score is fixed based on your repayment history, credit utilisation, credit age, credit type and total credit accounts etc.
While credit score is an important metric when approaching a bank for the loan, you don’t need to have one when approaching a fintech lender. Platforms such as CASHe offer loans to New to Credit (NTC) borrowers, leveraging alternative data sources such as smartphone metadata, social media footprint, education, monthly salary, career experience and basic KYC details to assess the creditworthiness of the applicant.
NTC borrowers must know that the moment you take a loan, your credit history is generated and shared with four credit bureaus – TransUnion CIBIL, Equifax, Experian and CRIF Highmark. If you are irregular with repayments, your credit score will reflect that and you may not receive home or car loan when needed or get it at exorbitant rates.
Not all borrowers receive the loan amount they are willing to fetch. Your credit score plays a big role in how your credit limit is fixed. As a best practice you should avoid utilising the full credit limit assigned to you. Consistently utilising the complete limit will affect your credit profile negatively.
How to maintain a high credit score
The most important part is to always make the repayments within the due date. Even if the borrowed amount is less, you must ensure paying it in full. You should refrain from applying for too many credit cards. Not reporting stolen or lost credit cards is another reason why your credit score may take a hit. “A lender will likely check and leave a credit application search footprint on your credit report each time you apply for credit. It is better to space out the credit applications and limit making several applications close together as this could signify financial stress to lenders,” cautions Kalyanasundaram.
Satyam Kumar, Co-founder and CEO of LoanTap, says their credit managers are well trained to explain and brief the customers well in advance, regarding all the know-hows of taking a loan. “To further educate our borrowers, we formulate informative pieces of content that can guide them on improving their credit score as well as avoiding actions that can have an adverse impact on their credit worthiness,” Kumar says.
Now there are start-ups that reward you for maintaining or improving one’s credit score and help you maintain a higher score. For example, CRED – an app that rewards members on maintain good credit score – gives them coins equivalent to the value of bills paid. Coins can be redeemed on exclusive offers, products, services and experiences with premium and luxury merchants. You need a minimum score of 750 to be admitted on the CRED platform.
“We help members manage credit better by giving deeper insight into credit behaviour, bringing transparency into the consequences of non/part-payment, and surfacing hidden charges. It also analyses spends in a transparent manner, aggregates patterns across multiple credit cards, and sends timely reminders for bill payment which can be done directly through the app,” says Kunal Shah, Founder and CEO of CRED.
How to avoid a debt trap
Fintech lender LoanTap encourages customers to follow the 50-30-20 rule on a regular basis to avoid a debt trap situation, especially if one is a frequent borrower. “The rule works as follows – 50 per cent of income should be spent on necessities like food, clothing and shelter, 30 per cent on discretionary expenses like travel and shopping, and 20 per cent on debt repayment and savings. This helps keep a tab on one’s expenses while it does not restrict anyone from borrowing further,” Kumar says.
What to do if already in a debt trap
The borrower can reach out to the respective lender to opt for a debt consolidation, that is, combining multiple debts into a single debt. “Debt consolidation allows borrowers to opt for a favourable payoff term with lower rate of interest and EMIs,” explains Ketan Patel, CEO, CASHe.
For example, LoanTap’s Credit Card Takeover loan is specially designed to consolidate debts/outstanding dues from multiple cards into one single loan at lower interest rates. They also provide EMI-free loans for debt consolidation which offers interest only payment every month and bullet payments every six months. “This helps reduce the monthly outflow by almost 40 per cent, thus minimising the chances of a debt trap situation,” Kumar says.
Improving your credit score
You must regularly track your credit reports to figure where you stand. There could be errors despite timely payments. If you have an issue with your credit score, you must approach your lender and the bureau to get it fixed on priority. “It is a good practise to review your credit report regularly to make sure it’s up-to-date and accurately reflects the circumstances as any mistake can hurt the credit rating. It is important to know that checking your own credit will not lower your score,” advises Kalyanasundaram.
Credit scores are continuously revised and refreshed based on your payment behaviour. In order to improve your score, you must clear all outstanding credit card dues and then start paying the dues on your loan regularly (month-on-month). “Once a borrower has managed to pay all the outstanding EMIs and has started paying the loan EMIs regularly, his/her score will start improving,” says Kalyanasundaram.
How to access credit reports
The RBI mandates one free credit report for all consumers from any of the four credit bureaus in India. Charges vary across the four credit bureaus. Quite a few fintech platforms including CRED let you access your credit report for free.