NEW DELHI: A credit score, though it has been around for a while, has become of the utmost importance with the outbreak of the devastating coronavirus pandemic. Thousands have been rendered jobless and many have suffered income losses due to salary cuts and the shutdown of businesses, which has led to a spike in defaults on unsecured loans or even delays in equated monthly installment (EMIs).
Consequently, their credit scores took a hit and these borrowers are now having a hard time getting new loans. In fact, new retail borrowers are often being isolated since banks are scrutinizing their creditworthiness a lot more these days. And even those that are able to access loans are missing out on getting the cheapest interest rates.
“As a convenient financing option, a personal loan helps one meet their urgent or lifestyle needs-a medical emergency, college fees, a vacation trip, or an expensive gadget etc. However, as it is unsecured, the lender needs to be sure of the creditworthiness of the borrower. Hence, it is good to maintain a consistent credit history so that you can access credit easily whenever the situation demands it,” explained Satyam Kumar, CEO and Co-founder of LoanTap.
Between January and May 2021, the digital lender witnessed a 120 per cent growth in loan applications compared to the same period last year and disbursed personal loans worth Rs 105 crore during the period. “However, with this growing demand, we have started risk-based pricing,” he added.
Of the existing portfolio, the new-age lender recorded a 3 per cent slippage from the standard to the irregular account since a significant number of borrowers have either had to deal with large Covid-related medical bills or had their non-essentials businesses shut during lockdowns, denting cash flow.
But setting aside keeping up a good credit score, a large chunk of the population still does not know what credit scores are or the fact that they have one. They only learn this key bit of information when suddenly, one day, a bank rejects their loan application and tells them it is because of their low credit score.
What is a credit score?
A credit score is a three-digit numeric summary of your credit history that falls in the range of 300-900. This is determined by the Credit Information Bureau (India) Limited (CIBIL) based on your past transactions with financial institutions. CIBIL is a credit rating agency and there are other bureaus such as CRIF High Mark, Equifax, and Experian that also serve to assess the creditworthiness of potential borrowers.
A credit score is also the first factor that lenders consider before deciding on their borrowers’ credibility and a score closer to 900 can get you better deals on credit cards and personal loans. Generally, lenders consider a credit score of 750, and above, as ideal and a person with a lower credit score is considered at a greater risk of defaulting. According to the latest data from CRIF High Mark, about 6 per cent of home loan borrowers who were earlier in the “Very Low Risk”, or above the 705 mark, have moved into the higher risk bucket. Similarly, for two-wheeler loans, about 25 per cent of “Very Low Risk” customers have slipped to riskier score ranges. In the case of auto loans, 15 per cent of borrowers have a high risk score, while 20 per cent of personal loan borrowers have high risk credit scores. It may be noted that these are the borrowers whose data is available with the credit bureau.
Many banks are now offering the cheapest interest rates to borrowers who have a higher credit score. For instance, LIC Housing Finance has recently reduced its home loan interest rates to as low as 6.66 per cent on tenures of up to 30 years. However, the rate is linked to the borrower’s creditworthiness as reflected in their credit scores. Others such as Kotak Mahindra Bank and Punjab & Sind Bank offer the lowest rate on home loans starting from 6.65 per cent.
But these low loan rates are not available to everyone. Usually, they are given only to customers with high credit scores of above 700. Salaried individuals generally tend to get a better rate than self-employed professionals and businessmen.
According to BankBazaar, factors such as irresponsible payment behaviour, sitting on outstanding debts, utilising over 50 per cent of your credit limit, availing too much credit in a short period of time, or rolling over the debt by paying only the minimum amount can have a negative effect on your score. If you have availed for restructuring or a moratorium, your score will not drop. But, if Covid-19 infected your credit score, here are a few ways that credit bureaus suggest can help improve it.
What really matters
And lastly, is a score of ‘NA’ a bad thing?
“Not at all. These could mean: You do not have a credit history or you do not have enough of a credit history to be scored, i.e. you are new to the credit system. You do not have any credit activity in the last couple of years. You have all add-on credit cards and have no credit exposure,” according to TransUnion CIBIL Limited.
It is important to note here that while getting a loan with a poor credit score can be challenging, it isn’t impossible. There are many new emerging fintech platforms and non-bank lenders that will offer you a loan even with a low credit score, but might charge a higher interest rate. Again, getting a loan for a large amount from them is unlikely.
