As society is becoming more consumption-driven, consumers’ dependence on credit has increased manifold. Credit essentially is a financial borrowing from a lender with a promise to pay back the amount in the agreed duration. A lender aims to profit by extending credit to the consumer at an interest rate, depending on how risky the credit would be. The ability of a consumer to repay the credit/loan is gauged through a “credit score”. A credit score is the rating of a consumer, on a scale and it is calculated based on the consumer’s payment history and other financial assessments. The higher the credit score, the most trusted a consumer is, in his ability to pay off the loan. In India, the credit rating is done by CIBIL, Experian, etc and they evaluate a consumer on a scale of 0 to 900. Banks are increasingly dependent on the credit score available with CIBIL to process a loan and consumers can utilize their credit rating to negotiate a better interest rate upon the loan. A credit score is your financial snapshot of the business world and dictates your competence in financial matters.
A loan request may stem out of an unplanned situation, such as a medical emergency, a family vacation, a new business opportunity, a desire to upgrade means of transport or house, etc, to name a few. Many financial institutions advertise their low-interest rates for loans. The point to remember here is, that they offer loans at a reduced interest only to those customers who have a high credit score. Once the intended borrower submits the documents to the lender, then the lender will connect with CIBIL to find out the credit score. A low credit score will immediately lead to the rejection of your application. Only when a lender is satisfied with your credit history that a loan be processed.
Let us assume three borrowers A, B, and C who want to borrow Rupees Ten Thousand for 5 years compounded annually. The following table can illustrate the impact of credit score on repayment.
|Name||Credit Score (300-900)||Interest % on Borrowing||EMI / Total Repayment|
From the table, it is evident how a good credit score will impact your total repayment, thereby ensuring that not only are your emergencies met but there are also considerable financial savings on the loan repayment when compared to someone with a low credit score. Sometimes financial institutions waive off the loan processing charges for clients with a good credit score.
One way to ensure a good credit score is the use of Credit cards. A lot of people in developing nations are averse to the idea of using a credit card, due to the horror stories they hear about it. Such horror stories exist only when you default on a loan payment or develop a casual approach to payments. Digitization of payments helps credit scorers to keep improving their credit score by looking at a clean repayment history of the client. Thus, it is pertinent for the consumer to be credit card savvy for their benefit.
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