THE REWARDS OF BEING A GOOD BORROWER

A good credit history pays off with lower interest charges

Good credit habits can lead to big savings. From October 1 this year, all floating-rate retail loans from banks—including home and auto loans— have been linked to external benchmarks. This new system has a provision under which the interest rate a borrower pays is also influenced by their credit profile. As a result, many banks have begun categorising borrowers based on their credit score, and will be charging different ‘credit-risk’ premiums based on these categories.

Banks will largely be using the credit scores assigned to consumers by credit bureaus to determine which category a borrower falls into. “The credit score is one of the major factors in determining the creditworthiness of an applicant. Those with good scores have a higher probability of meeting loan repayment commitments. As banks are increasingly moving toward a risk-based pricing of loans, they are trying to entice creditworthy applicants by charging lower credit-risk premiums,” says Radhika Binani, chief product officer, Paisabazaar.com.

Bank of Baroda, Bank of India, Union Bank of India,

Syndicate Bank and UCO Bank are some prominent banks that have already begun using credit scores to decide the risk premiums of floating-rate home loans. For instance, if you have a ‘very good’ credit score—760 or above—you can get a home loan from Bank of Baroda at 8.1 per cent. However, if your credit score falls below 760, you will have to pay an additional 0.25 per cent, bringing the final rate to 8.35 per cent. If your credit score is below 725, the bank will add 1 per cent, bringing the final interest rate to 9.1 per cent. Aside from this, many banks are also using their internal consumer ratings and other parameters to determine risk premiums; however, even in these cases, the credit score remains crucial in determining the risk premium.

➘ MAINTAIN THE SCORE

The credit score is a dynamic number, changing based on your borrowing and repayment history. Therefore, the interest rate of a loan linked to your credit score also changes over time—it is not fixed at the initial rate at the time the loan is disbursed. To maintain the same interest rate, consumers have to make sure their credit scores do not fall substantially during their loan tenure. “Fluctuations in the credit score adversely affect borrowers, even for short-term loans. Our credit partners do quarterly checks of our borrowers to assess their credit scores and repayment behaviour,” says Anuj Kacker, COO and co-founder, MoneyTap.

Banks have the mandate to change interest rates under the external benchmark system if a consumer’s credit profile changes substantially. Lenders typically check borrower credit scores on a quarterly basis. “A drastic fall in the credit score of a borrower can lead to an increase in the loan rate,” says Binani. For instance, the Union Bank of India charges a premium of 0.2 per cent for CIBIL scores of 700 and above; however, if the CIBIL score falls below 700, the bank may increase that premium to 0.3 per cent.

➘ IT’S SIMPLE, REALLY

Good credit habits are the best way to maintain your credit score. “The most important thing to remember is to make payments on time for all availed credit, whether a credit card or a retail loan. Maintaining a healthy debt-to-income ratio, avoiding applying for credit from multiple lenders simultaneously and preventing electronic cheque bounces and defaults are crucial,” says Aditya Kumar, CEO and founder, Qbera. ■

These days, many insurers offer coverage to senior citizens, either via special schemes or by including senior-centric features in general schemes. There are also specific plans for diabetics and heart patients. However, unlike general health insurance, plans for senior citizens come with many caveats, including higher co-payment, strict medical tests, specific exclusions and longer waiting periods for those with preexisting diseases (PEDs).

➘ HIGHER PREMIUMS The general principle in insurance is ‘the higher the age, the higher the premium’. This is especially true for health insurance, because the probability of medical problems rises with age. However, there is a large variance in premiums across policies for senior citizens— Religare Health Insurance’s Care Senior has a premium of Rs 24,645 per annum, while Max Bupa Health Insurance’s Health Companion charges Rs 46,040 per year. The difference largely comes down to the variance in co-payment—the higher the co-payment, the lower the premium.

➘ CO-PAYMENT CAN REDUCE PREMIUMS Essentially, co-payment requires policyholders to bear a certain percentage of any medical expense, while the insurer covers the rest.

For example, Star Health Insurance’s Senior Citizen Red Carpet plan has a mandatory co-pay provision of 30 per cent (50 per cent for pre-existing conditions). The annual premium for an insured sum of Rs 10 lakh is Rs 26,550. Suppose one were to claim a bill of Rs 10 lakh after 10 years of premiums—the policy would require you to pay Rs 3 lakh (30 per cent) yourself, while the balance would be covered by the insurer.

Practically speaking, one would have paid a total of Rs 5.65 lakh—Rs 3 lakh as copay and Rs 2.65 lakh as the cumulative premium.

In comparison, Max Bupa Health Insurance’s Health Companion’s annual premium is Rs 46,040, with no co-payment required. Therefore, if one were to make a claim of Rs 10 lakh after 10 years, one would have paid a total of Rs 4.6 lakh as premiums (though the insurer covers the full amount of the medical bill).

Should one avoid copayment plans, then? Not necessarily. “Ideally, you should get a comprehensive plan without co-pay, as these are without limitations. But if you are not eligible for it because of your age or a pre-existing ailment, you could choose a plan with the co-pay option,” says Amit Chhabra, business head of health insurance, Policybazaar.com.

➘ SUB-LIMITS

Since seniors are vulnerable to age-related medical conditions such as cataracts, diabetes and high blood pressure, it is important to check if the policy fully covers treatment for such problems. Most seniorcentric health plans come with disease-based limits. For example, Dr S. Prakash, joint managing director, Star Health and Allied Insurance, says that on policies with an insured sum of Rs 5 lakh, the limit for claims on heart-related health problems tends to

CO-PAYMENT REQUIRES POLICYHOLDERS TO PAY A PERCENTAGE OF EXPENSES. THE INSURER COVERS THE REST

be around Rs 2.5 lakh. It is important to keep such conditions in mind before buying a policy.

➘ DISEASE-SPECIFIC It can be difficult for people with diabetes or heart disease to get insurance, though insurers are attempting to serve such customers as well. “We offer a diabetic-specific plan—Care Freedom— even to insulin-dependent patients,” says Anuj Gulati, MD and CEO, Religare Health Insurance. “Also,

Our Care Heart plan is suitable for those who have undergone a cardiac procedure, such as angioplasty or a stent implant.”

Other similar plans include Star Health Insurance’s Diabetes Safe Plan— for a premium of

Rs 21,240 per annum, the sum insured is Rs 5 lakh. Apollo Munich Health Insurance’s Energy Silver offers the same coverage, at an annual premium of Rs 30,291. It also offers a ‘no claim bonus’—that is, a 10 per cent increase in the basic sum insured for every claim-free year, up to a maximum of 100 per cent.

➘ PREMIUM REVISION Until recently, getting insurance for those aged 75 and above was not possible. Today, most schemes targeting this demographic, such as Religare Health’s Care Senior, Care Freedom and Care Heart and HDFC Ergo’s my:health Suraksha come without age barriers. The IRDAI has also made it mandatory for insurers to offer lifetime renewability of policies, though there could be revisions in premiums every five years or so. On an average, premiums for those aged 65 and above increase by 25 per cent every five years, says Sanjay Datta, chief of underwriting, claims, reinsurance and actuary, ICICI Lombard General Insurance. However, this is not always the case. Star Health Insurance’s Dr Prakash says that the company has not revised premiums for senior citizens for the past 12 years. Some companies offer specific plans under which premiums freeze at a specific age. “The premium remains constant after the age of 71 years under my:health Suraksha and after 61 years of age under my:health Medisure Super Top Up policy, until IRDAI allows a premium revision across ages and segments for a product,” says Anurag Rastogi, president, accident and health, HDFC ERGO General Insurance.

➘ PRE AND POST HEALTH CHECKUPS Most health plans for senior citizens require extensive medical tests. However, some companies offer insurance without such tests. Religare Health and Star Insurance are two such. Under Star’s Red Carpet plan, if buyers provide certain medical reports, such as a stress thallium report, a blood report and a sugar report (blood and urine, fasting and post-prandial) the insurer may even be willing to offer a 10 per cent discount on the premium.

Most senior-centric schemes also offer annual health check-ups. “All our products offer an annual health check-up each year at no extra cost. These can be customised for senior citizens as per their needs,” says Religare Health’s Gulati. Policies also come with benefits—complimentary access to doctors on call, discounts for those who stay fit and complimentary access to health assessment reports. ■