Personal finance: Don’t slip on your credit score

Has the pandemic thrown you off your financial plan? Here’s some sharp analysis to help you tide through. First up, what to prioritise if you’ve taken a loan
By Abeer Ray, Mumbai
UPDATED ON DEC 07, 2020 04:19 PM IST

One of the overlooked personal finance consequences of the coronavirus pandemic that has caused an immense disruption in the economy and left many out jobs is the effect it will have on the credit score of those struggling to pay off their liabilities — loans, bills, medical expenses. However, this doesn’t have to be a long-lasting worry. With a few smart financial decisions, it is possible to rebuild a good credit profile even during a pandemic. Credit scores between 580 and 669 are deemed fair. A poor credit score can lead to credit card rejection, loan availability at high interest rates, increased premiums on insurance policies, etc. It’s a question of pivoting your financial outlook, especially during times of distress, where we may be tempted to make different choices.

Prioritise debt repayment

Non-payment or late repayment can have a damaging effect on your credit score. Naveen Kukreja, Chief Executive Officer and Co-founder of Paisabazaar.com, an online comparison portal for personal finance products said, “Non-payment of EMIs would not just impact one’s credit score, but also hurt his/her ability to borrow in the near to medium term.” What this means is that even after income levels are restored consumers may not be able to fulfill important life goals simply because they are ineligible to avail of a loan.

Get rid of credit card debt

Using credit cards to shop or to get cash can trap you in a debt-like situation. What’s more, interest rates on credit cards are high — ranging from 2.5 per cent to 3.5 per cent every month on average — which could add to the burden of debt. To maintain a high credit score rating, always pay off your credit card debt in full. Rohit Garg, co-founder and CEO SmartCoin, an online personal loan application site said, “With current uncertain times, you never know when you might require cash urgently. High balances and/or late payments on credit card accounts can hurt your credit rating and you might face difficulties when you need to apply for a loan.” Using the credit card for cash involves withdrawing your money from the ATM using your credit card. However, you can withdraw cash up to your card’s credit limit. However, the interest charges are much higher than on a loan that begets interest charges not more than 10 per cent every year.

Maintain a balance between secured and unsecured loans

Many of us opt for personal loans and loans against credit card limits, which are unsecured loans. By contrast, secured loans include loans against property, car loans, etc. Secured loans are those that are backed by a collateral. You must ensure a balanced credit mix of secured and unsecured loans to maintain a healthy credit score. According to Vineet Patawari, CEO and Co-founder, StockEdge & Elearnmarkets, an online institution for stock training, unsecured loans must be repaid with urgency. “Unsecured loans like personal loans, credit card dues, etc. come with a higher interest rate and should be paid off as soon as possible. The government has announced EMI moratorium during the COVID period, but in a normal situation the schedule of secured loans like home loan and car loan should not be disturbed as it carries the risk of the backed asset being seized by the lender.”

Avoid multiple loan inquiries during this period

The urgent need for money prompts many people to inquire about loans and credit cards. While these may help secure the money, it is advisable to apply for a loan or credit card only when in utmost need. Raj Khosla, founder and managing director, MyMoneyMantra, an online comparison portal for loans and credit cards, says, “Multiple loans and credit card inquiries can hurt credit score. Thus, you should never initiate multiple simultaneous credit queries. For a good CIBIL score, always ensure optimal credit utilization, a right credit mix of secured and unsecured loans and repayment regularities.”

Consolidation of debt helps

The RBI on October 27, 2020 instructed all lending institutions to waive off interest on loans up to Rs. 2 crores for the six months’ moratorium period from March 01, 2020. Thus, there would be no effect on credit score if you are unable to repay the loan now and opt for the loan moratorium. While it is understood that you might miss out on a couple of repayments in the coming few months, it is the best time to consider consolidating your debt to avoid future delays. Consolidation of debt entails taking out a new loan to repay other debt and liabilities.

Personal Finance is a weekly feature that aims to provide our readers pertinent and helpful financial information

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