We all come across some situations in life where we cannot do without credit, instances could be going in for higher education at a foreign university, buying a vehicle, a home or it could be even an expensive gadget.
Sadly enough, you need a credit score for getting any credit. Credit score and availing credit for the first time is kind of a chicken and egg situation. You cannot get credit without the score and you don't develop your credit score without availing credit.
Close to a million Indians join the workforce every year, not all are lucky to get jobs; but even those who do, run the risk of getting rejected on loans and credit cards due to a lack of information on credit score. Statistics say that 50% of the loan applications get rejected due to lack of credit score.
There are two parties affected here:
The lenders who are missing out a huge segment of the population who are not under the radar of the Credit bureaus. This is an age of consumerism and the working population, especially the youngsters, are keen on buying the latest stuff in the market, be it the gadgets, clothes or vehicles and require credit to do so. But may not have easy access to credit due to the absence of credit score. The numbers in this segment are too huge to ignore. This could also include the people in the unorganized sector like the self-employed plumbers, electricians, running small businesses etc.
Lenders could make credit reach them through a number of ways like
Tie-ups with credit management service providers: Lenders could look to have tie-ups with companies which look to provide credit to those without history, taking decision making beyond the credit scores, which could, in turn, assist the lenders in reaching more markets and customers.
Tie-ups with reputed companies: Banks and other financial institutions could explore having tie-ups with reputed companies and could lend to their staff on the basis of salary details provided by the company. In such instances, the company could ensure that the employees are regular in their repayments.
Joint tie-ups with consumer durable agencies and credit management service providers: Lenders could go in for a joint tie-up with agencies selling vehicles, consumer durable gadgets etc and the credit management companies to deal with those people who are desirous of making a purchase on credit. Credit Management service providers could use their methods and processes to determine the creditworthiness of individuals apply for credit.
These are some of the options available to lenders to make credit reach this population but what are the options available to a borrower who doesn't have credit history/credit score.
Options Available To A Borrower
Take Small Ticket Loans Initially To Build Credit History: Based on your salary slip/bank statement, many small ticket loans are available to those even without credit scores. Make sure the repayments are regular so that you gain good numbers on your credit score.
Go In For Loans Against An Asset: If the requirement is small, an individual can avail a loan against an asset like gold, fixed deposit etc. As the lending is against an asset which is mortgaged, lenders often do not insist on extensive documentation and credit scores. Regular repayments on these kinds of loans will help you build up a good credit score. Going in for a credit card against a fixed deposit is also a good way to build a credit score.
Agree To Borrow On Higher Rates Of Interest: Lending to a person without a credit score is a riskier proposition for any lender. To compensate for the higher risk involved, lenders may agree to lend at a higher rate of interest.
Peer To Peer Lending (P2P Lending): This is a new segment of lending and borrowing that has come up in the recent years. Unlike in a traditional setting, P2P lending makes away with the financial institutions. P2P agencies are like marketplaces where a lender (could be anyone) and borrower are matched according to their needs. Though P2P companies do their bit of due diligence before allowing anyone to borrow, you may still be eligible for borrowing on these platforms with credit score.
Approach Credit Management Service Providers: There are numerous fintech who are in the space of making credit accessible to each and everyone. They have tie-ups with banks and other financial institution and would be able to help you with offerings that will help you build up a credit score.
Getting credit score initially is not a big deal, maintaining a healthy credit score is important to ensure that you remain eligible for credit anytime.