Why should millennials take credit seriously?


Increased competition among lenders and advances in technology have made borrowing an easy affair. Risk management tools have evolved with technology and now allow lenders to better assess borrower risk before lending.

“Loans are now available instantly through digitization and the ability to take out credit for a customer in real time. For consumers, this means easy access to credit, especially for young first-time borrowers. Our data shows that millennials contributed more than 50 percent of these loans in volume, with their contribution increasing by 7 percent between 2015 and 2019,” says Ashish Singhal, Managing Director, Experian Credit Information Company of India Pvt. ltd.

Millennials, due to being more tech-friendly than the older generation, have emerged as the largest category of digital borrowers. “We also observed that while more millennials are borrowing, there is no significant increase in average borrowing per customer, indicating that more millennials are entering the formal credit system. Very young borrowers (age group 22-25) showed a 15% increase in contribution over the same period, with around 55% being first-time borrowers,” says Singhal. Access to credit also has adverse consequences if not managed properly.

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Why is the credit report important?

Every time borrowers apply for a new loan or line of credit, lenders check their credit history. Credit bureaus are the custodians of all borrowers’ credit history. In accordance with RBI guidelines, all institutional lenders must share data of every repayment made by all their borrowers with these credit bureaus. Credit bureaus prepare a report called a credit report, which includes details of past repayments made by borrowers.

“The credit report displays vital information about an individual’s credit accounts, repayment behavior, number of credit applications, total credit balance, incorrect credit entries/applications, if any, and the average credit utilization ratio, etc. The information in one’s credit report is extremely essential as lenders base their lending decisions on it,” says Aditya Kumar, Founder and CEO of Qbera.com.

Credit bureaus assign a credit score to each borrower based on this report and various other factors. “Your credit report is a summary of all your financial borrowings and the score is calculated after taking into account your debt level and repayment history,” says Singhal.

The higher your credit score, the better your chances of getting the loan. A higher score not only gives you quick access to the loan, but also lower interest rates than others. This score helps lenders make quick decisions and allows them to process loans much faster and often instantly.

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The cost of default

The borrowing part can be easy, but it is the repayment part that is often long and trying. If you flounder on repayment, it can impact your credit history. Borrowing beyond one’s means is a threat, which often weighs heavily when people have easy access to credit. If they do, it leads them into a debt trap. The credit bureaus have developed a mechanism by which they can predict the propensity for future default by analyzing your current and past borrowing behavior.

“The credit score is influenced by a host of factors such as the customer’s product ownership, repayment discipline, credit usage, borrowing size and loan type, etc.,” explains Singhal. When you frequently inquire about new loans from many lenders, it also negatively affects your credit score.

“A poor knowledge of your credit score and the factors that influence it can sometimes limit your ability to borrow. closed loan can impact your score,” says Singhal. Therefore, when it comes to credit score, repayments are of course important, but you should also be attentive to credit inquiries.

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Who is most failing?

When you don’t calculate or care about the consequences of your action, the chances of making mistakes are higher. “The age group between 25 and 35 has the highest propensity for defaults,” Kumar explains. Even among this lot, new credit users are the most vulnerable when it comes to making borrowing and repayment errors.

“Our study shows that delinquency for this segment (22-25 age group) is slightly higher than the rest of millennials. Since the total exposure and ticket amount is very low, this poses no risk to the entire industry. However, defaults by these customers could impact their ability to borrow in the future,” Singhal says. So if you are a young borrower for the first time, you must be careful before borrowing.

Which defect is the most damaging?

The loans are basically of two types – one is a secured loan in which the lender takes collateral, which he can liquidate in case of non-payment and the second is an unsecured loan, which is granted without any collateral. Although all defaults negatively hamper your credit report, the extent of the impact may differ.

“Defaults on secured loans affect an individual’s credit health far more than defaults on unsecured loans,” says Kumar. So, if you have a car loan, a home loan or a loan against any financial security, you must be extremely careful while borrowing so that you do not borrow beyond your means.

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“We observe that in a crisis, a consumer would first default on an unsecured product – while protecting their secured asset. Therefore, a consumer who defaults on secured assets would normally be under deeper stress , so the impact on the score will be Additionally, defaults on secured loans tend to be of a higher amount, which further amplifies the impact,” says Singhal. default on your home or auto loan, it can have a big impact on your credit score.

How to make sure you have a clean credit history

Being aware of the consequences of irresponsible borrowing is essential to keeping your credit history clean. The first thing you should do is only take out a loan amount that you are sure you can repay. Once you have taken out loans, you need to be sincere about repayments.

“There is a need for discipline in their repayment habits. Some of these defaults may simply be due to a lack of discipline in payments. Therefore, it is better to give standing instructions for repayment of loans,” says Singhal.

Regularly monitoring your credit report is also a good way to ensure that you don’t have any unpleasant surprises later. “Checking your report regularly can help prevent potential damage from incorrect credit entries. It also helps you understand how you can improve your credit health and improve your chances of being approved for loans or credit cards at the future,” says Kumar.

If there is any deviation, it will help you take timely corrective action to limit the damage. “Your credit report also provides a summary of the institutions that have accessed your information. This is a way to check for any unauthorized access to your report. As a consumer, if you miss a payment, there are ways to build up and improve your score by working on key factors like credit usage that impact your score,” says Singhal.

Regular checking of your credit report ensures its accuracy. “Consumers should stay on top of the report and ensure all information is correctly reported by their financial institutions, which could negatively affect their score. Knowing your score helps you access credit and will help you avoid surprises. when applying for a product credit,” Singhal says.

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