Student Credit has Arrived in India. Here's How it Can Help Young Indians
Taking credit while you are in college will soon become a norm over the next few years
It’s quite popular in the west to get your first credit card as you turn 18, but in India the general accepted age for getting a credit card has been 23 (because historically banks have been reluctant to approve anyone for credit before that age). This trend is changing now and student credit has arrived in India because of a few fintech start-ups who are addressing this market. If you are studying in a college in a tier-1 city, chances are that you have already used this service yourself or heard about it from a friend.
As this segment grows, taking credit while you are in college will soon become a norm over the next few years. Hence, it is important to understand as a college student and as their parent about the risks and rewards associated with taking credit for small and large ticket purchases from these companies such as smartphones, movie tickets, DSLRs.
Since it’s not a popular phenomenon in majority of colleges in India yet, the first question that comes to mind is — ‘Wait a second: credit? As in loan? Are you telling me that I cannot afford to buy things and need to take loans all of a sudden? Am I not rich enough?’ These are not the reasons to start using credit for purchases. Of course, as long as you can easily manage to pay for something right now, you are better off without credit (although you should still keep taking some small amount of credit for the reasons mentioned below). As a 21st century college going student, you need to understand that credit is a very important part of our financial ecosystem and your ability to get higher credit (credit worthiness) from financial institutions is a really valuable asset to have which not many people with even the best of the jobs possess.
Here are some reasons on why using credit in college makes sense, and how you can navigate college without getting into any trouble due to it.
Central Credit Score
Prospective employers, lenders, landlords and even cell phone providers may pull your credit report (CIBIL Report) as part of a background check or ask you to submit it, but there won't be anything to see if someone has never managed a line of credit.
Graduates with a healthy credit score have a distinct advantage over others. Similar to a high grade point average, a high credit rating will open doors to opportunity when the time is right. Preserving that advantage often means waiting to build a strong financial foundation before making a lifestyle upgrade. Responsible students should be working toward an endgame – moving out, buying their own car – and all of that is going to take a positive credit file.
Entrepreneurial adults who might seek a small-business loan someday also need to have an established credit history. But just taking micro credit isn't enough – you have to use it and make payments on time in order to have evidence of responsible borrowing and repayment reflected on your credit report.
The simple rule of thumb to avoid trouble is to make sure that you repay what you owe on the due date you initially agreed upon. There are a lot of costs of running a credit company, like collections and physical follow ups and risk of losses. To cover for these costs, all the lending companies tend to charge penalties which could be much higher than the interest cost if you don’t repay on time. Delayed payments also get reported on CIBIL and it doesn’t go well with your credit score
Easy Access to Premium Products
Buying an expensive laptop or latest smartphone are expenses that happen once or twice over a period of 2-4 years and it’s really easy to convert these and other similar large ticket purchases into monthly payment plans. This makes the purchase affordable while you don’t have to overburden your parents and can pay for it partially or fully using your own pocket money or income.
Point of precaution here is to not spend if you think you cannot repay the amount back with the interest on the due dates. Also, go for monthly payment plans rather than paying minimum due amounts on credit cards which keep on accruing interest that becomes a big problem for students who don’t repay until a long time. With monthly payment plans, you need to pay back on the due date which keeps you in check.
Peace of Mind
Credit can be a handy financial tool when an emergency situation calls for like bike repair, sudden travel plans or even having to spend more on books than was budgeted.
Parents can rest easy knowing their kid has credit at their disposal. Protect that peace of mind by having a plan to repay the debt as quickly and affordably as possible.
Of course, it’s a double edged sword and as a parent you should talk to your child and go over some examples of when using credit in an emergency (or rather what should you consider an emergency) is OK so there are no misunderstandings or excuses.
Going over monthly statements can be a powerful way for parents to help their kids monitor spending. Parents should sometimes ask their kids for the monthly statements and make them understand on how can they manage their money wisely by planning for their expenses and EMIs in advance. What you want to avoid, as a student, is end up racking up too much debt.
One way to ensure this certainly happens is by starting off with a small credit line, say around INR 10k-20k.
Bajaj is a 24-year-old graduate of IIT Kharagpur and the Founder of SlicePay, a fintech company that offers student credit to college pupils in India.