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Creditworthiness can aid financial health

Missed payments are the primary reason loans are rejected in the future. These payments should not be taken lightly

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A confluence of factors such as a rise in consumerism, lending innovation, a generally buoyant economy and rising incomes have resulted in the proliferation of credit in India. This has happened particularly for consumer loans that facilitate the purchase of electronic gadgets, vacations and medical expenses – to name a few.

Credit is a good thing. It helps improve standards of living, helps us in times of need and provides a boost to the economy by fueling purchases. However, like anything else, too much of something could become problematic.

Relevance of creditworthiness

Maintaining sound financial health is paramount for an individual to be able to secure credit in the future. When it comes to financial health, people assume it has to do only with investments and protection plans. However, managing credit effectively is equally important. Access to credit could get impaired if your credit worthiness (defined by your credit score) is not maintained. In other words, a high credit score means you are financially healthy.

People who are just entering the credit life cycle sometimes don't have a deep understanding of what they are signing up for by taking a loan. Lending innovation has facilitated access to credit to people who previously had no track record, that is, a credit score and report. How has this happened? Lenders have become particularly savvy and provide loans in less than 10 minutes to consumers looking to make small purchases. This is true both for offline and online stores.

Sometimes, consumers don't even realise that they are taking a loan and that their repayment behavior will be reported to credit bureaus who then create a credit score and report for the consumer.

Rapidly rising credit exposure

Problems could arise when people start accumulating credit without realising it. Rapidly rising credit exposure is the first sign of potential financial illness.

Firstly, while access to credit provides the financial freedom to buy things, on the other side it assumes that the borrower also pays back on time.

Secondly, people who are new to credit tend to be people who have just got their first job and their first taste of independence. Consumerism coupled with speed of disbursal sometimes leads to a propensity to spend extravagantly.

The challenge arises when consumers don't pay back on time and only realise that this is problematic when they struggle to get loans at a later date.

Below are a few things to keep in mind as you begin your credit journey:

Always pay on time: Missed payments are the primary reason loans are rejected in the future. These payments should not be taken lightly

Check credit score, report regularly: Once you have taken a loan, the lender reports your repayment behavior to credit bureaus. Typically, 780 is considered a good score by lenders.

Keep repayments under check: Ensure that your monthly debt repayments don't exceed your living expenses. While a relatively simple life rule it is often missed. This basically means that you should keep a sharp focus on the purchases you are making on credit to ensure you don't put yourself in a position where you end up in default.

Innovation has made it possible to have access to more things. It is up to our own discretion and prudence to ensure that we don't end up in financial trouble.

The writer is country manager – India, ClearScore

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