Personal Finance

How to improve your credit score post-pandemic

Navin Chandani | Updated on February 25, 2021

It is an opportune time to reflect on your financial faults and correct past mistakes

When any adversity hits, we as human beings put our rational thought process on the back-burner and err. If these decisions are linked to financial matters, then the cost multiplies, snowballing beyond one’s control.

When the pandemic struck, the behaviour was no different. Loss of job or paycuts, bulky medical expenses – borrowers were forced to cut corners. Loan and card bills suffered, impacting the credit score.

As green shoots emerge, it is an opportune time to reflect on the financial faults and correct the past mistakes such that your credit score gets a fillip.

The Reserve Bank of India’s moratorium gave respite to borrowers for the period between March 1, 2020 to August 31, 2020, while ensuring that the moratorium seekers’ credit report is not affected.

However, there could be other aspects such as credit utilisation and monthly repayment obligations which need your attention now.

A good credit score not just brightens the prospects of getting a loan, but also determines the rate at which the loan is given. If another catastrophe strikes, a high credit score acts like a shield to guard you from a credit crunch.

Start with the basic step of sourcing a copy of your credit report from either of the credit bureaus. Note that every credit bureau offers the borrower a free credit report once a year.

Pay up costly loans

To make ends meet during the pandemic if you went all out seeking loans, especially withdrawing cash using credit cards, then that should be your first rectification step. Cash on credit card is the costliest loan and any surplus that you have, should be used to pay that at the first instance.

Next on your radar should be to shorten the list of loans, trimming them based on the interest rate you pay – the highest rate loan paid out first. Fewer loans mean better focus at handling debt, which augments your credit score.

Continue older loan/ credit card

To shorten the list of loans, do not consider closing the older loans or credit cards first. With the older loans and credit cards there is credit history, and this can positively impact your credit score.

Restructure loans

If you are struggling with your loan repayment as the pandemic left you without a job even six months later, then sit across the table with your bank and renegotiate the payment terms, interest rate or EMI amount, such that it is easier for you to pay. Such restructuring of loan enables you to make timely repayment on your terms, ensuring your credit score is not affected due to loan defaults.

Minimise credit utilisation

Using up 100 per cent of your credit card or overdraft limit indicates your inability at handling money. Bankers fix their gaze on what is referred to as ‘credit utilisation’ or the amount of free credit limit available on your cards. Instead of using up 90 per cent of your credit limit on one credit card, it makes immense sense to have three cards with 30 per cent credit limit consumed. This simple but critical step aids to your credit score as only a small portion of the available credit limit has been used.

Lastly, treat these credit sanitisation practices like hygiene. Difficult to establish, but once inculcated, they feel like second nature.

(The writer is, MD and CEO, CRIF High Mark)

Published on February 25, 2021

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