By Radhika Binani
Millennials have a higher propensity to indulge in lifestyle spends. Hence, maintaining a strong credit score is crucial for them to avail loans and credit cards with better terms and conditions.
Here are six ways how a strong credit score can improve the financial health of millennials.
Higher loan eligibility
Lenders pull out credit reports of loan applicants to evaluate their credit worthiness. Usually those with a score of 750 and above have higher chances of loan approval as they are considered financially more disciplined and hence, have lower risk of credit default. Those with a lower credit score are viewed as riskier prospects by the lenders and hence, may find it challenging to get their loans approved.
Lower interest rates on loans
Many lenders follow risk-based pricing for setting the interest rate of loan applicants. As loan applicants with higher credit score involve lower credit risk, lenders try to entice such applicants with lower interest rates. On the other hand, lenders compensate for higher credit risk involved in lending to those with lower credit score by charging higher interest rates.
As risk-based pricing model can vary across various lenders, millennials should compare loan rates offered by as many lenders as possible before selecting the final one. They can visit online financial markets to view the loan offers from multiple lenders based on their credit scores, monthly incomes, job profile, etc.
Lower processing charges on loans
Like in the case of interest rates, some lenders have started rewarding applicants with higher credit scores by either waiving off or reducing loan processing charges. As processing charges can constitute a substantial amount, especially in case of big-ticket loans, a waiver or reduction of such charges can result in significant reduction of cost of credit. Such preferential treatment is highly unlikely for loan applicants with poor credit scores.
Higher chances of credit card approval
The reason for availing credit cards is no more limited to availing instant credit. Today, availing a credit card is also about deriving various benefits such as discounts, cash backs, airmiles/rewards, no-cost EMIs, etc., through credit card transactions. However, just as in case of loans, credit card issuers consider credit scores as one of the main factors while evaluating credit card applications. Hence, those with good credit scores have higher chances of credit card approval.
A strong credit score can also help in availing credit limit enhancement. An increased credit limit will increase your spending power via credit card, thereby boosting your potential to make big-ticket spends or deal with financial exigencies.
Access to pre-approved loans
Various lenders and online financial marketplace extend pre-approved loans and credit card offers on the basis of credit score. Such pre-approved loans or card offers may come with better product features, low interest rate and quick processing time. Pre-approved offers can also help you in providing a fair idea of your loan eligibility and cost of availing credit. This might help you in negotiating with other lenders for securing better loan deals.
Higher eligibility for loan balance transfer
Lenders often try to attract existing borrowers of other lenders by offering balance transfer options at lower interest rates. Under the balance transfer option, the new lender will repay the outstanding loan amount to the existing lender, whereas the borrower gets to reduce his interest cost. Some lenders may also allow a longer tenure for the transferred loan, resulting in lower EMIs.
However, just like fresh loan applications, lenders will evaluate credit score while extending a balance transfer application. Some lenders may also consider the credit score while setting the interest rate of the transferred loan. Thus, maintaining a higher credit score will increase the eligibility of millennials for availing loan balance transfers at lower interest cost and/or with lower EMIs.
The writer is chief product officer, Paisabazaar.com