On daily basis i receive large no of queries on Credit Score Rating. As i keep highlighting that currently, the credit bureaus consider more than 70 data points to arrive at you credit score rating. In my opinion, it is mostly an eye wash. At the end of the day what matters the most is a handful of data points. I shared these critical factors in my post, Credit Report – 5 Important Factors that decides your credit score. Secondly, you cannot expect an overnight change in your credit score rating. Credit Score is a reflection of your credit behavior and may take up to 6-9 months to reflect in a credit report.
The lending models are undergoing a major change in India. For example, as i shared that Peer to Peer lending is gaining traction in India thus replacing more dreadful private lending. Similarly, a couple of startups introduced payday loans in India. A payday loan is a very popular concept in the western world. It is similar to salary advance. A small value loan is approved as an advance to salaried professionals for very short duration i.e. max 30 days. It is repaid when the borrower receives the salary.
To summarize, small sums/value/advance/loan for short periods are gaining more traction. The purpose of the loan is not critical for such advances. These small sums can be advanced to online sellers, small businesses, students, for purchase, financial emergency etc. Therefore, these small sums for short periods will be white label loans i.e. without any name. In coming years, the max credit growth will come from this segment. The risk assessment under this segment will be completely different compared to existing practice to check CIBIL Score. Secondly, the data points to approve these small sums advanced for short duration will be different from existing Credit Score Rating. The lenders will assign their own credit score rating based on their own data points. Let’s check out 5 factors that will influence your Credit Score Rating in future.
5 Factors That Will Impact Your Credit Score Rating In Future
1. Social Media Activity:
Social Media Activity is the reflection of your lifestyle. One of the key criteria for approval of small sum advance will be spending ability. In other words, if you are frequently posting pics of your foreign holiday or eating out then it implies you have good spending ability. Thus the probability of approval of small value loan is HIGH. On the contrary, for high value loan like home loan, this behavior shows that you are an impulsive/exorbitant spender.
Now it is contradictory to what i mentioned related to social media accounts in my posts on Income tax. If your lifestyle is not in line with your income tax return then be ready to host taxman at your doorstep. It is a catch 22 situation or dilemma for the taxpayer but again in my opinion if you pay high tax then you don’t need small value loans or advances. Therefore, in future, you should be very careful about what you are posting on social media platform.
2. Relationship Stability:
During my young days, there were only 2 types of relationship status i.e. single or married. These days it is “COMPLEX” in the true sense. Even though relationship status is considered as a key factor today but in future the focus will be more on relationship stability. For example, if person A is in a living relationship and need a small sum credit or personal loan for the purchase or rather shopping of a girlfriend. In this case, the risk is high or probability of default is HIGH. The reason being person A is not in a socially committed stable relationship. If the relationship goes sour then in all probability he will default on the loan.
On the contrary, married people still considered being in a stable relationship. Therefore, today if you apply for a loan towards the purchase of home appliance then the married person will not face any hurdle. In other words, it is assumed that being married means stable relationship though it might not be true always. Whereas in my opinion, in future the lender will check for relationship stability through various mediums/platforms including social media. Another way to check relationship stability is how many times husband and wife called each other. This can be checked through call details. In the case of the strained relationship between husband and wife, the loan or credit can be rejected including the home loan. In short, relationship stability will be key credit score rating factor in future.
3. Social Circle and No of Friends:
A friend in need is a friend indeed. An individual with a large social circle and more no of friends is least likely to default on loan/credit. Therefore social circle and no of friends will be key credit score rating factor. The reason being, in the case of any financial emergency/default the friends will come to the rescue of a borrower. A big headache for lenders will be to find out “Virtual” and “Real” friends. I might be having 2000 friends on social media platform but it is imp to know, with how many of these friends i am in a regular/constant touch. It can be checked through chat/messenger/call details/social media activity etc.
Another key factor will be the quality of friends from credit perspective :). During my childhood, my father used to tell me that you will become a good boy if you have good company “friends”. The reason being, friends are a key influencer for an individual. You must have observed on my blog that majority of comments mention that “my friend said this” or “my friends told this”. Therefore, if i have the company of friends whose tendency is to default on loans then in all probability i will also join the league. My thought process will be that there is nothing wrong in it. I will not be surprised if social circle will be crucial credit score rating factor considered by lenders in future. Your loan may be rejected if any of your close friends is loan defaulter.
4. Behavioral Aspect:
Currently, this factor is considered by the organizations for recruitment and promotion. The lenders may try to analyze the personality through the application form, email or phone communication with the potential borrower. Trust me it is a quite effective technique to find out the personality of an individual. Based on my experience, i can say that expert in this domain can predict with 80% accuracy the probability of default. It can be one of the important credit score rating factors.
Here i would like to share a small incidence from my school days i.e. 25 years back. Our English teacher always used to tell us that you should give prime importance to grammatical mistakes and writing style. It shows the personality of an individual and approach towards life i.e. casual or serious. Now her teachings will help her students to avail load/credit after 25 years :). Therefore, communication with the lender will convey a lot about the borrower and can be deciding factor in credit score rating.
5. Affiliations:
Have you ever wondered the reason why most of the cooperative banks are in bad shape? The answer is because they lend money to people with a close affiliation to political parties or near & dear ones of the director. In turn, the director is also affiliated with a political party or dominant caste group in the region. I might be sounding harsh, there is an unwritten rule to default on a loan from a cooperative bank if the borrower is affiliated with the political party or director of the cooperative bank.
In my opinion, affiliation especially with the political party or specific group should be key credit score rating criterion. Besides political party, the lender should also check affiliation to any caste based groups. These affiliations can be found out through social media channels.
I also came to know offline that some of the lending platforms have a negative list of certain professions based on their past experience i.e. loan defaults. On anonymity, one of the co-founders of startup lending platform told me that they discourage lending to a particular set of professionals as they tend to default on loan/credit facility. Therefore, here affiliation also means particular professional. To clarify, it is the unwritten rule and none of the bank or lenders will admit this openly.
To summarize, any affiliation to a negative list maintained by lender means loan rejection. Now i understood why my father always told me that you should never disclose your political affinity. Though it was not in the context of this post but i agree that we should learn from the experiences of elderly people. Their teachings and experiences can come to our rescue.
Words of Wisdom:
Let me add that though small sums/value/advance/loan for short periods is high volume and profitable business. At the same time cost to recover the default is same irrespective of the loan amount. To maintain profitability, it is important for lenders to consider all the critical credit score rating factors that may point to a possible default in future. For example, recently home loan of one of my colleague was rejected. This despite the fact that he is earning well with a credit score of 890 (One of the highest i observed till date). Quite interestingly the reason given by bank DSA was poor credit score. After a lot of insistence and through links we came to know since he works in IT industry, therefore, his loan is rejected. After recent developments in IT sector, banks might have put IT sector in the negative list (It is my conclusion).
In my opinion, the 5 points shared in this post will be critical credit score rating factors. The only flip side is that if your loan/credit will be rejected because of any of these factors, the lender will never disclose the same as i shared through example in the previous paragraph. The only reason a borrower may come know will be POOR CREDIT SCORE. Till date, it is the sole reason for loan rejection even if the credit score is 890.
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