Have you been planning on making a purchase exceeding your budget?
In such situations, we often turn to EMI and choose it as our mode of payment. It is safe to say that Equated Monthly Instalment, widely known as EMI is a popular payment option used by prospective buyers who cannot afford to pay upfront and wish to manage the cost.
The annual consumer study of 2022 - How India Borrows? - conducted by Home Credit India concluded that more than 50% of the borrowers surveyed show preference & acceptability for EMI Cards when it comes to shopping or for any credit need. It also stated that 75% of the borrowers took credit for buying consumer durables, home appliances, home renovation, and business purposes.
Despite several credit options being available, there is a prerequisite for availing credit. Before you purchase on credit, you need prior approval to ensure that you meet the requirements and are eligible for a credit limit. Checking your credit report allows the lender to evaluate your creditworthiness and the risk associated with sanctioning an amount to you.
Your request to secure a credit limit gets approved based on your credit score. To elaborate, a credit score is a three-digit number ranging between 300 - 900 which tells the lender how likely you are to pay off your debts. A higher credit score demonstrates good credit health.
To make affordable financing accessible to all, banks and non-banking financial companies (NBFCs) share your credit history with four major credit bureaus overseeing the computation of credit scores. They are - Experian, TransUnion CIBIL, Equifax, and CRIF Highmark. CIBIL is the most widely recognized of all. Credit Information Bureau India Limited (CIBIL) is a credit information company that keeps track of credit-related activities of individual borrowers.
A good credit score may work in your favor in many ways. Assume that your CIBIL score is 790. As a result, chances of you being offered preapproved loans and credit cards by renowned banks may increase. Not only can you now spread the entire cost of a product over a few months and pay it in easily manageable installments, but you may also be charged a comparatively lower rate of interest owing to your good credit score.
A higher credit score may make it convenient for potential borrowers like you to access approval for mortgages and other loans for planning a big purchase or investment.
Your application for a loan with a weak credit score may seldom get approved though the quantum of that loan may be lesser than what you applied for. On the contrary, a higher credit score facilitates better chances of a higher loan limit
Do you know about the process behind the calculation of your credit score?
If you are someone without a job and credit history, a purchase made using the Buy Now, Pay Later (BNPL) facility may help you build a credit profile.It will be treated as a loan while being reported to credit information bureaus. Many e-commerce websites have started accepting and providing this facility. LazyPay is one of the many online credit platforms available to consumers that allow you to establish your credit history by providing you with a BNPL limit as low as ₹300. This limit may get increased if you make timely repayments.
Another good way to build your credit score is to get a secured credit card. While some banks require a minimum deposit, others may need you to open a fixed deposit account in exchange for a credit card. Your fixed deposit account acts like a security deposit and would serve as collateral for the bank if you fail to pay your dues. Almost all major banks in India offer secured credit cards with different names. The Bank of Baroda Prime Credit Card issued against a fixed deposit of ₹15,000 or more and the ICICI Bank Instant Platinum Credit Card issued against a fixed deposit of ₹20,000 or more are a few examples.
If you are a jobholder, your bank may also provide you with a credit card if you apply for it through your salary account.
Remember to pay your installments on time to maintain a good credit history. If you are behind on your payments, your credit record may suffer. It is a common fallacy that taking out multiple loans at once will help you establish a credit history. However, this may cause you to fall into a debt trap or may give rise to the need to settle your loan accounts if you, unfortunately, lose your job. A settlement of loan accounts indicates your poor behavior as a borrower and creates a negative impression in the eyes of the lender.
When you are someone without a credit history, prevent yourself from requesting a loan approval impulsively without checking your eligibility. A rejected loan application negatively impacts your credit history.
Lastly, make sure to monitor your credit utilization ratio. According to Equifax, your credit utilization ratio, generally expressed as a percentage, represents the amount of revolving credit you're using divided by your total credit limit.In other words, it is the amount of credit you use compared to your credit limit. The recommended credit utilization ratio is below or equal to 30%.
To summarize, good credit health is important as it may affect your ability to get approved for loans and credit offers. Moreover, good credit history and score will help you establish financial security, prudent spending habits, and a responsible financial routine.