4 credit traps you should know about to protect your credit profile

While most traditional lenders check the CIBIL score to approve a loan or credit card application, some emerging financial companies offer credit regardless of your credit score. Apart from the easy and quick availability of credit, there are many other reasons why these financial companies are gaining popularity. Among these is the flexibility and ease of borrowing for small needs as well as high value needs. And with digital provisions, most companies offer credit with a process that is completely online and within minutes.

However, some credit services that give you easy access to credit at breakneck speeds can actually become a credit trap down the road. Falling into a vicious cycle of debt can have a negative impact on your creditworthiness. Therefore, it becomes relevant for you to know about these pitfalls and avoid them to protect your financial stability. To make it easier for you, here are some credit pitfalls you should keep in mind when making a borrowing decision.

Buy Now Pay Later feature that encourages impulse spending

Have you ever come across something that you wanted to buy but didn’t have the resources to pay for it at the time? Buy Now Pay Later, commonly known as BNPL, can help you in such situations. BNPL is a feature offered by lenders to allow you to easily pay for your purchase at a later date, either by dividing the cost into smaller installments or in a lump sum. You can normally use this feature to purchase a smartphone and repay the cost once you receive your salary.

While it can help, relying on it too much can lead to additional debt that you may not be able to keep up with. This could then prevent you from repaying, which can negatively impact your creditworthiness and lead to high interest rates which could escalate into a debt trap. Check the CIBIL score or credit score in such circumstances and you will see its effect if you are unable to repay as per the terms.

Payday loans that may require you to spend beyond your means

Payday loans are quick financing solutions that you can access in times of urgent need. These loans come with the condition that you repay the amount when you receive your salary. However, these can leave you financially vulnerable if you do not manage your borrowings properly as they only offer temporary relief. Payday loans usually come with a higher interest rate than traditional loans, which can increase your repayment burden. Therefore, you may need to borrow more to pay off your existing debt.

EMI conversion which makes the repayment term longer than necessary

Have you ever found yourself in a situation where you could only buy something if you paid for it in installments? EMI conversion is something you can do directly at a retail store or using your credit card. While this allows you to increase your affordability, it also involves certain fees and charges. It also tempts you to take the longest repayment term which also affects your budget in the future. Failing to pay these EMIs on time can also affect your creditworthiness and result in fines and interest penalties which can strain your finances.

Fine print with hidden costs that increase the cost of borrowing

Reading official documents and understanding credit terms and conditions is a habit to get into regardless of your financial situation. Often the fine print can mention hidden costs and conditions that can increase your cost of borrowing in the form of high interest on late or missed payments. This results in either an increase in your EMI amounts or an extension of your repayment term. An increased cost of borrowing can cause you to pay more than you planned or can afford. Therefore, you can get stuck in a cycle where you continue to borrow to pay off existing debt or continue to miss dues and accrue interest.

One important thing to remember is that these services are not designed to push you into a debt trap. One reason they may seem that way is due to an overreliance on readily available credit that doesn’t require a lot of paperwork and is quickly accessible. In most cases, you won’t know if any of these services actually affect your creditworthiness. Luckily, you can avoid falling into such a trap with just a few steps. When you check CIBIL score or credit score regularly, you can monitor your credit decisions and learn from them. One of the easiest ways to do this is to check out the Bajaj Finserv website. Here you can check CIBIL score by PAN card in minutes and get your results instantly. So check your CIBIL score today and stay informed about your creditworthiness.

Disclaimer: This article is a paid publication and does not involve any journalistic/editorial involvement of the Hindustan Times. Hindustan Times does not endorse/endorse the content(s) of the article/advertisement and/or opinions expressed herein. Hindustan Times shall not be in any way responsible and/or liable in any way whatsoever for anything stated in the article and/or also with respect to the view(s), opinion(s) ), announcement(s), statement(s), affirmation(s) etc., stated/presented in the same.

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