How Does Loan EMI Payment Affect Your Credit Score?

India’s digital lending market is growing exponentially with youngsters being the driving force. Right from credit cards, buy now, pay later, and personal loans, the credit appetite of Indian consumers is expanding year after year.

India’s lending market grew by 11.1% in 2022 according to the Credit Bureau Report.

While more and more consumers are getting credit from banks and other lenders for a variety of purposes, it’s very rare for them to think about how it affects their credit score.

This article is all about understanding how taking credit and the way you pay EMIS can affect your credit score. Here we go.

What is a Credit Score?

Credit score of a person determines his or her lending power or creditworthiness. It basically indicates how likely you are to repay the debt. Credit score is calculated in numbers, which ranges anywhere between 300 and 900. The higher your credit score, the more money financial institutions will be willing to lend you.

The Reserve Bank of India has licensed four credit information companies to calculate credit scores of individuals. These are Credit Information Bureau (India) Limited (CIBIL), Experian, Equifax, and Highmark. The most popular credit score in India is the CIBIL rating.

How is Credit Score Calculated

Credit information companies consider a long list of factors to calculate your credit score. Every company gives different weightage to different factors and based on that arrives at a credit score.

The factors that affect your credit score are as follows:

• Monthly income

• Past debts

• Repayment history across all debt categories

• Loan default history

• Number of loans and credit cards you own

• Difference between secured and unsecured loans

Three Things that can Affect Your Credit Score

Here are three things that can affect your credit score:

1. Credit Utilisation Ratio

One way to keep a healthy credit score is to keep an eye on your credit utilisation ratio. Maintaining a healthy credit utilisation ratio is usually for consumers who have credit cards. It basically refers to the amount of credit you use out of your total credit card limit. You should keep in mind that the utilisation ratio is calculated on all the credit cards you have.

The lower your credit utilisation ratio, the higher your credit score will be. Banks prefer that you utilise less than 40% of your credit card limit. 

2. EMI-to-Income Ratio

As a rule of thumb, lenders assume that an individual will use 50% of their monthly income for regular expenses. That is why they frown upon consumers who have disproportionate EMI commitments compared to their monthly income.

You can calculate your EMI-to-income ratio by dividing your income with monthly EMI loan payments and credit card payment.

Your credit score is quite sensitive to how you maintain your EMI-to-income ratio. Your maximum EMI-to-income ratio should not be more than 50%, else it will reflect poorly on your credit score.

3. Missing EMI Payments

One way credit rating agencies assess your creditworthiness is by checking how many times you miss your EMI payments. Even if it’s delayed by a few days, it can adversely affect your credit score.

If you have missed your EMI payments, you still have a chance to improve your credit score by not missing payments for the upcoming months. It takes about six to eight months of timely payments for your credit score to improve.

How Paytm can improve your credit score

How you pay your EMI loans is intricately related to your credit score. And if your credit score is affected adversely, there are less chances of you getting a loan from financial institutions.

Paytm provides a simple and quick way to pay EMI on your loans as well as credit card bill payments. Here is how you can use Paytm app to pay EMIs and credit card bills so that your credit score remains in the green:

• All Billers at One Place: Paytm has partnered with almost all the lending companies and banks to enable customers for easy EMI payments. You simply open the Paytm app and search for the lending institution you have to pay the bill to, and make the payment.

• Payment Reminders: Once you link your credit card or loan account with Paytm, you will start receiving reminders every month to pay the bills. These reminders have a link to proceed with the payment. This way you will never miss a payment because you didn’t remember the due date.

• Set up Automatic Payments: This is the best solution for you if you have multiple EMIs to pay and it becomes too much hassle to make each payment every month. You can automate your loan EMI payments on Paytm for every payment. Your automated EMI payments are secure and a sure-shot way to ensure you never miss any EMI payments.