Millennials, You Should Be Doing a Lot (More) To Manage Your Credit Scores! Credit and credit scores institutionalize the idea of 'trust' in lending/borrowing through numbers and algorithms

By Amit Das

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As a generation, millennials prefer every part of their lives to keep pace with their ambitions, instead of being a hindrance. Very often, bad credit scores can be just that, a hindrance of and managing credit scores, a tedious task.

Why should I care about credit scores?

Credit and credit scores institutionalize the idea of "trust' in lending/borrowing through numbers and algorithms. The credit score, a three-digit number ranging from 300 to 900, is an assessment of the eligibility to repay the loan one has taken. The higher the score, the better a borrower looks to potential lenders.

Let's assume that you applied for an INR 25,000 loan from a fintech and were rejected. It means that the fintech company does not trust you to repay the loan. The reason behind the rejection is your low credit score.

Basically, if you miss paying an EMI (or loan instalments) or delay paying credit card bills, it might lead to a bad credit score and a lesser chance of getting loans approved.

Are millennials aware of their credit scores?

Surprisingly enough, it seems that the current crop of young professionals are quite savvy about credit scores. In India, millennials and Gen-Y are a demographically and socially evolving segment. They seem to have a certain (often enviable) recklessness about borrowing and spending. Their attitudes towards money and investing differ from the previous generations—often because of the safety net provided by their parents or a growing philosophy of #YOLO (you only live once).

Social media also influences their spending decisions, making them more open to borrowing flexible amounts to fund their lifestyle and needs. While credit is increasingly accessible and convenient, consumerism and debt traps often go hand-in-hand.

Historically, the younger generation has been severely impacted economically every time there has been a crisis, and 2020 is one such example. It is encouraging, however, to see them being aware of their scores, even though there needs to be a greater education towards managing those.

Why is someone's score low?

There are a host of reasons but some of them are more intuitively understandable than others.

Making late payments: Being late on due payments of credit cards or loans can hit your credit score. Delays of more than 90 days or a write-off can significantly affect your score and any chance of future loans.

Increasing utilization of credit lines: Utilization measures how much of credit limit you use on your card lines. A consistently high utilization (for example, 90 per cent-plus) of your assigned credit limit can hurt your credit score.

Applying for too many credit lines, such as cards, payday loans: Financial institutions look down upon multiple applications/enquiries for loans/credit products by consumer within a short time span. It suggests that the person is a high-risk borrower.

Rising number of open and/or closed credit lines: A large amount of unpaid debt can affect your credit score, especially if there are unsecured loans, for example, multiple credit cards with outstanding balances.

Determining the length of credit history: If you maintain a long (and good) history with financial institutions, they trust you more, which is reflected in your score.

The bottom line is to take only as much credit as you need and make the repayments on time.

Can I improve my chances of getting a loan?

Check your credit report regularly: More importantly, ensure that all the data on your credit reports is factually correct and updated. Multiple addresses, delays, disputes need to be actively addressed and resolved with institutions. Also, ensure that the corrections are reflected in subsequent bureau reports.

Use your credit lines well: Your existing credit lines can help in fixing your low credit scores, for example moving some expenses to a credit card and paying the bills on time could help improve the credit score in six to nine months.

Understand your capacity to repay: Regular payments such as rent, domestic staff, etc., might be a significant share of your monthly income, leaving a smaller share for loan repayments. The capacity to repay can often lead to loan rejections.

Go cash-less: To develop a good credit history, start using digital payments more often. This helps in building trust with new-age institutions.
Improve your alternate data footprint: A new way to improve your chances of getting a loan is to keep your alternate data healthy. Lenders may assess your creditworthiness differently—by analyzing your spending and income patterns to conclude your ability to manage your finances. They look at proxies from other financial transactions, like electricity, mobile bills, wallets and recharges, etc., to decide your eligibility.

The next time you need a loan, remember that your credit score is a big factor. So is your alternative credit score.
Amit Das

CEO and Founder, Think Analytics

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