With a gradual restoration of business activities after the double-barrelled lockdowns, it’s time to assess your financial health with an eye on a much better future. Any household that opted for Covid-19 relief scheme(s) in FY 2020 and 2021—such as RBI’s EMI/credit card moratorium relief package, loan restructuring, emergency Covid-19 loan, or similar—needs to now rationalise its finances. The credit bureaus have been mandated to not explicitly record moratorium relief; lending institutions, however, will enquire if the applicant has availed any such reprieve. If yes, then there is the inevitable impact on creditworthiness to worry about now.
For a variety of some very good reasons, remedial action on shoring up the credit score is strongly recommended.
The advantages of a good credit score are a universal truism: you enjoy several pre-approved bank offers and also favourable rates of interest. Six fundamentals steps for maintaining and improving your credit rating are explained below:
Your lenders and card-issuing banks periodically share your account and repayment details to the credit bureaus, namely CIBIL, Experian, Equifax or CRIF Highmark. You can always access your credit information report from any of the top credit bureaus and analyse your credit score. You can even pull out a free credit report online.
Ideally, you should check your credit report two-three times a year. It helps you review all of your credit accounts in one place. By keeping a check, you could be rest assured that there is no error, misreporting or suspicious activity on your credit report. You can always take timely action, dispute the error, and therefore protect yourself.
If you have multiple loans and credit cards, try to pay off the highest interest rate debts first. For instance, interest rates on the rolling over of credit card dues would be anywhere between 24-48 percent per annum; personal loan EMIs would be calculated at 11-18 percent per annum; while home loan, car loan or loan against collateral will range anywhere between 6.5 percent to 12 percent per annum. Your cardinal principle should be: minimise exposure to expensive loans.
As a rule of thumb, never roll over credit card balances. It entails a usurious interest cost and also late payment penalties. It is always advisable to convert card outstandings into loan EMIs which are priced at a much lower rate of interest. Credit cards usage should be optimised for the free credit period. Multiple credit cards with varying settlement dates will maximise free credit.
Instead of relatively expensive unsecured and/or short term credit, existing home loan customers should opt for the available overdraft (OD) facility. This will be a low-cost option to navigate the prevailing storms and to defray urgent and unexpected obligations. On your prevailing home loan, the bank will be happy to offer an OD facility (as per eligibility) at a marginally higher (1 percent or so) rate of interest. With an OD facility, there’s concomitant flexibility and the possibility of lowering the aggregate interest cost of the loan. The same would be available if you opt for a loan against a self-owned car. Essentially, focus on cutting down on expensive loans.
Multiple personal loans and a high credit card utilisation ratio reflects the unusual credit appetite of the borrower. As a key step to buttress your credit history, you must ensure that your existing credit facilities (cards, loans) are not always utilised to the very maximum, thereby classifying you as perennially credit hungry. Maintain headroom.
Difficult times often lead to difficult decisions. Covid-19 pandemic took a toll on the financial health of even the most disciplined folks. Going forward, you should try and maintain a 30 percent credit usage. This will eventually help restore your credit rating from bad or fair to a good score.
For any delinquent or irregular loan accounts, take steps to mitigate the consequences of the prevailing delinquency. Keeping the account in red can damage your credit profile. Opt for options such as debt consolidation, loan restructuring, balance transfer or an account settlement, basis the available options. Contact your lender and reset loan terms to ease the monthly cash flows. Be it multiple late or missed payments, you need to come up with a robust plan to make future payments on time. You cannot erase credit history but can build the future by observing strict financial discipline.
Credit history is one of the important indicators of financial wellness. Accordingly, older credit accounts with flawless repayment records will be a confidence booster for any lender. So, even if you have ceased to swipe your very first credit card, you should never surrender it. It is long-standing proof of a decent credit record.
You require financial prudence and discipline for repairing your credit score, successfully navigating the ongoing financial stress. Herein, frugal living can be your best ally.
Frugality doesn’t connote missing out on life, but making some conscious decisions to manage your current cash flows. Simple steps like outlining the budget, journaling inflows and outflows, avoiding impulsive purchases, sticking to buying lists, eliminating fresh credit card bills, delaying unimportant or big-ticket purchases can verily support your cause. A penny saved will become a penny earned, especially in times of crisis.
Constantly envision plans for incremental income streams, devise an inflation-proof and shock-resistant savings strategy, and observe strict timeliness in honouring financial commitments. The above-mentioned cumulative efforts will gradually mitigate financial stress and you will naturally develop an enviable credit history.
The writer is a managing director of MyMoneyMantra.
The thoughts and opinions shared here are of the author.
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