Due Diligence. Managing your credit score during Covid-19 times

During uncertain times such as now, being credit-confident (being confident of obtaining a loan with fewer hassle) is as important as having a contingent fund ready.

The first thing that the financial institutions check while processing a loan application is the credit score.

In India, the credit score ranges between 300 and 900. Higher the credit score, higher is the probability of your loan being approved. A higher credit score also means that you may get the loan at lower interest rates. Generally, a credit score above 750 is considered good.

With furloughs, layoffs, and pay-cuts being commonplace now, one needs to pay more attention to the factors that affect the credit score. For, once the credit score falls, it may, sometimes, take more than a year to restore it to normal levels.

Here are a few factors that play an important role in determining the credit score, and ways of managing them well to maintain a decent score.

Pay dues on time

Your credit history significantly impacts the credit score.

Credit reports contain details of loans taken earlier such as name of the lender, EMI amount, repayment history (before or after the due date), number of days past due and outstanding amount.

Any delay in repayments will be considered a red flag by the lender who will process your application cautiously.

Especially during times of crisis such as this, it is important to pay off your debts first and save/spend later. If you cannot afford to pay the entire due amount now, try to at least pay the minimum amount due that is allowed by the lender.

This will not only prevent your credit score from falling but will also save you from paying more money in the future in the form of interest for the delayed period and the penalty.

At this juncture, if you have opted for moratorium allowed by the Reserve Bank of India (RBI) and deferred the repayment of dues to a later date, you need not worry about your credit score getting impacted.

As per the RBI, the rescheduling of payments, including interest, will not be qualified as payment default by the lending institutions. Revised due dates and revised repayment schedule will be considered for categorising the account as standard, sub-standard and non-performing asset (NPA).

RBI has also advised the credit information companies to make sure that such restructuring does not adversely impact the credit history of borrowers.

Keep a tab on your credit score to see if there are any discrepancies and if your credit score is mistakenly lowered on opting for the moratorium.

In such cases, you can raise a dispute. Almost all credit information companies provide an online option to submit grievances.

After the moratorium period ends, if you need some more time to start repaying the dues, negotiate with the lending institution and check if restructuring of the loan is possible. This way, one can avoid the ‘defaulter’ tag.

Note that your credit score also gets affected by the repayments of loans which are co-signed, jointly held and for which you provided guarantee. Pay heed to such loans as well.

Minimise credit utilisation

The credit utilisation ratio that calculates the credit utilised against the revolving credit (usually credit cards) limit available is another important factor in calculating the credit score.

Low credit utilisation ratio implies that you are not relying too much on credit, and this will earn you some brownie points.

Experts say that ideally the utilisation of credit card limits should be below 30-40 per cent, for building a good credit score.

Thus, do not overdo the usage of your credit cards now, thinking that the dues can be repaid later when the financial situation gets better. Also, note that credit cards charge high interest rates that can sharply push up your liabilities.

Further, lenders also determine your total credit exposure from details provided in the credit report. If you apply for more number of loans to come out of the current liquidity crisis, chances of loan requests in the future being accepted could reduce.

That’s because banks assess your ability of repayment of a new loan considering your total EMI liability (existing EMIs plus new EMI) against your total income.

Thus, try to keep your borrowing low. Instead of borrowing, you may be better off using your existing investments to meet contingencies. Do a cost-benefit analysis before deciding.

Also, reduce your fund requirement by curbing unnecessary spending habits. Tracking your expenses can aid you in this endeavour.

Note that not having a credit history or no credit activity in the last few years may also not be ideal.

As per CIBIL, the credit policy of some lenders prevents them from providing loans to an applicant with no credit record — having credit score of ‘NA’- not available, or ‘NH’- no history.

Thus, it could help having a credit history, but credit needs to be kept at reasonable levels.

Apply for loan cautiously

Making multiple loan applications could adversely impact your credit score.

This is a continuation to the earlier point of optimising the credit exposure.

Credit information companies list the details of all lenders who recently requested your credit history in the ‘Enquiries’ section of the credit report. Needless to say that lending institutions buy your credit report from credit information companies to assess your credit-worthiness before sanctioning a loan.

More number of loan applications in a short period could indicate that you are desperate for credit. Also, if the loan application gets rejected, your credit score would be damaged.

So, apply for a new loan with a financial institution only if it is essential.

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