The article focuses on credit scores and how Fintech firms are using alternative methods to check the creditworthiness of individuals to sanction loans.
A credit score is a numerical representation of an individual’s creditworthiness. It considers several factors, such as payment history, outstanding debts, and credit utilization. A credit score determines an individual’s ability to obtain a loan, credit card, or rental agreement. In India, a credit score is calculated by Credit Information Companies (CICs) like CIBIL, Experian, and Equifax based on the data provided by banks and other financial institutions.
Ignoring your credit score can lead to several drawbacks that can negatively impact an individual’s financial well-being. In this article, we will discuss the drawbacks of ignoring your credit score and how fintech companies make loans easier in India for those without a credit history.
- Difficulty in obtaining loans: A low credit score can make it difficult for an individual to get a loan. Banks and financial institutions consider an individual’s credit score critical when deciding whether to grant a loan. A credit score of 750 or above in India is considered good, and individuals below 750 may face difficulties obtaining a loan. This is because a low credit score indicates that an individual has a history of missing payments or a high debt level, which increases the risk of default.
- Higher interest rates: If an individual has a low credit score, they are likely to face higher interest rates when applying for a loan. Banks and financial institutions charge higher interest rates to individuals with low credit scores as they are considered high-risk borrowers. This increases the overall cost of borrowing and can significantly impact an individual’s finances.
- Difficulty in obtaining credit cards: A low credit score can also make it difficult for an individual to receive a credit card. Credit card companies use credit scores to determine an individual’s creditworthiness and the risk of default. Individuals with low credit scores are considered high-risk borrowers and may be denied a credit card or may have to pay higher interest rates.
- Difficulty in obtaining rental agreements: A low credit score can also make it difficult for an individual to obtain a rental contract. Landlords use credit scores to measure an individual’s financial stability and the risk of default. Individuals with a low credit score may be denied a rental agreement or may have to pay a higher deposit.
- Impact on insurance premiums: Insurance companies also use credit scores to determine the risk of default. Individuals with low credit scores are considered high-risk and may have to pay higher insurance premiums. This can significantly impact an individual’s finances and make it difficult to afford insurance coverage.
The above drawbacks of ignoring your credit score highlight the importance of maintaining a good credit score. In India, many individuals need a credit history and face difficulties obtaining loans and other financial products.
Fintech companies in India have considered India’s situation and developed innovative solutions to make loans easier for individuals without a credit history. Fintech companies use alternative data sources to calculate an individual’s credit score. These sources include utility bill payments, mobile phone bill payments, and social media activity. This data is used to determine an individual’s creditworthiness and the risk of default.
Fintech companies also use technology to automate the loan application process, making it easier and faster for individuals to obtain loans. This includes using artificial intelligence, machine learning, and big data analytics to assess an individual’s creditworthiness and determine loan eligibility.
In conclusion, ignoring your credit score can lead to several drawbacks that can negatively impact an individual’s financial well-being. Fintech companies in India are using alternate means to fund those without a credit history.