Catch up on missed payments as early as possible and make on-time payments to improve your credit score
Instead wait for a month or so and then apply again. This will reduce the hard enquiry on your report.
In addition to everything else that has been impacted by the coronavirus pandemic, many an individual’s credit scores have also nosedived because of it. Credit score determines the eligibility for availing a loan. If you fall behind your bank loan EMIs or credit card bill payments after the end of the moratorium period, your score is in danger of a precipitous fall. Let us discuss below some of the key ways you can boost your credit score.
About credit score CIBIL (Credit Information Bureau India Limited) assesses your credibility based on factors such as your credit history, timely repayment of dues on loans/credit card, frequency of loan application, number of ongoing loans, and various other factors. CIBIL scores are measured on a scale of 300 to 900. The ideal CIBIL score that a borrower needs to have is 750. Again this score will vary according to the banker / financial institution and type of loan. Among the various factors, payment history is the most influential factor in your credit score. If you are late in remitting your EMIs without the accommodation from the banker / lender, it will have a significant impact on your score.
Ways and means to mend your score To start rehabilitating your score, you need to catch up on missed payments as early as possible and make on-time payments going forward. For instance, you can avoid delinquency by paying the minimum amount due on your credit card, but you will end up paying interest on the balance amount you carry over from month to month. If the minimum amount due is not manageable, ask your credit card issuer to lower the amount or allow you to defer your payment for a few months or modify the terms until you are in a better financial position. Generally, signing up for an automatic minimum amount due remittance will help your payments to be made on time.
Look at your credit utilisation ratio Another significant factor which affects your credit score is the amount you owe on your credit cards expressed as a percentage of your card limits, which is popularly known as credit utilisation ratio. The lower the percentage, the better for your score. As a general rule, keeping your card balances to about 20% or less of your credit limits should be beneficial to enhance your score. If you are holding more than one card, then your credit score considers the credit utilisation ratio of both the cards as well as the aggregate across all your cards.
Be cautious with new credit If you need a lifeline when money is tight, you may consider a personal loan. When a bank / financial institution pulls your credit report for the loan approval, it will get reflected in your report as a hard inquiry. If you apply for several personal loans across banks it will reflect multiple hard inquiries in your report and inflict damages to your score.
The frequency with which such hard enquiry is getting reflected in your report ranges between 30 and 45 days. So, if you apply for a loan and are denied by a banker do not rush to another bank immediately. Instead wait for a month or so and then apply again. This will reduce the hard enquiry on your report.
To conclude, Covid-19 has affected everyone across the world in multiple ways. Follow the above guidelines to boost your credit score which will enhance your chance to avail your future credit needs without much hassle.
The writer is a professor of finance & accounting, IIM Tiruchirappalli
the scorecard Your credit score is based on factors such as credit history, trend of repayment of dues on loans/credit card, frequency of loan application, number of ongoing loans You need to have a minimum score of 750 to get a loan Ask your credit card issuer to lower the minimum amount due or to defer your payment for a few months or to modify the terms until you are in a better financial position Keep your card balances to 20% or less of your credit limits to enhance your score