The global pandemic caused by COVID-19 and the subsequent national lockdown has overthrown financial plans. Add to that, the unprecedented job losses and pay cuts have stressed out Indian households. The RBI had extended the 3-month moratorium (now extended for 3 months more) for all term loan repayments, without affecting your credit score.
To maintain a good credit score, it is very important to understand the nitty-gritty of credit score details. In this article, we will look at various ways to keep a healthy credit score, focused on the uncertainty we are facing in times of COVID-19.
1. Know more about your credit score
It is important to know what constitutes your credit scores and credit history. With the right financial practice and awareness, you can take adequate remedial measures if your score is low. Usually, a credit score above 750 is considered a great one. This will enable you to easily avail loans or a credit line. Your credit score is highly dependent on your ability to repay your debts regularly. Keep a quarterly track of your score – if it is below 700, then work on regularising your repayments so your score can improve.
2. Keep a regular check on your credit report
This may be the time when your income is uncertain or irregular. Monitor your credit score generated from your respective credit bureaus. Ideally, these reports are generated by four major credit bureaus operating worldwide – TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. Banks and NBFCs provide the required data to generate authenticated scores from an individual’s and organization’s active credit accounts, financial history and payment records.
Your credit score signifies your repayment capabilities and creditworthiness for loan applications. Credit report mistakes are very common – regular checks can avoid major discrepancies. A low or irregular credit score can severely impact your worthiness and lenders might hesitate to give you future loans.
3. Pay off credit card debt
Credit card interests are among the highest in the market – this makes credit card debt the most expensive. It is advised that you pay off credit card debt in full, whenever possible, to maintain a high credit score.
In case you are financially hit right now and can’t pay off the debt in full, keep making the minimum payment – this will keep the account in a standing position. It helps you avoid late fees, helps you conserve some cash in the short run and also keeps your credit score high. Maxing out a single credit card is a big no-no as it impacts your credit score drastically.
4. Consolidate Your Debt
If you are anticipating that you may miss repayments for the next couple of months, it is better to consolidate your debt. Missing EMIs will result in negative consequences on the credit score.
Have a DMP (Debt Management Plan) in place. Many organizations, including third party companies, provide guidelines to borrowers who struggle to make multiple payments or high repayments. Talk to your bank/ NBFC to understand how you can consolidate multiple high payments into one loan repayment with a longer repayment tenure. If you are in dire straits, opting for the current RBI moratorium can relieve you temporarily from paying off term loan EMIs. However, be prepared to pay the accumulated interest after the moratorium ends.
5. Repay bills on time
As stated earlier, the most important criteria to maintain a good credit score is to pay all your bills on time. Any delay in payments adds to the existing dues as penalties. It can lower your credit score and rebuilding a poor credit score takes a significant amount of time. If you are making multiple payments on credit card bills plus EMIs on term loans, try and set reminders or opt for auto debit from your bank accounts.
6. Avoid using your credit card to get cash
Credit cards may offer reward points for withdrawing cash using your credit card but avoid this option at all costs. This comes with various hidden charges such as cash advance fees, finance charges, late payment fees – all of which add up to your withdrawal amount. Ultimately, it leads to a debt trap at high interest rates and severely affects your credit score. In case you need cash for emergencies, dip into your savings or ask your family or friends to help out. You can also opt for a credit line like MoneyTap where you can withdraw flexible amounts and set a comfortable EMI repayment tenure.
During any crisis, it is a good idea to create an emergency fund. Do the same by cutting out unnecessary purchases and spending only on essentials. Contact your lenders and financial institutions if you are facing any financial difficulties. If you follow a few hygiene rules, you will be able to maintain a good score and this increases your options for future credit needs.