Personal Finance

How to maintain a good credit score in times of COVID-19

Updated : July 07, 2020 08:25 AM IST

The coronavirus pandemic has not only impacted the health condition of people, but it also has had a major impact on the financial status of people.

In such a situation, debt offers a financial cushion for individuals who are in urgent need of money.

However, it is essential to effectively manage the credit/CIBIL score so that customers can get a loan immediately.

The coronavirus pandemic has not only impacted the health condition of people, but it also has had a major impact on the financial status of people. With salary cuts and job losses, many individuals are finding it difficult to manage their finances. In such a situation, debt offers a financial cushion for individuals who are in urgent need of money.

However, it is essential to effectively manage the credit/CIBIL score so that customers can get a loan immediately.

CIBIL score is an important metric that is used by financial institutions to check when they receive a credit request from individuals. Every time an individual applies for a loan or a credit card, the recent CIBIL score is checked.

According to experts, any score above 700 is considered excellent. However, that may vary from one bank to another.

Here are some of the tips to maintain a good CIBIL/credit score in times of COVID-19:

Debt repayment should be the first priority

It is advisable to pay the EMIs on time whenever possible. One late payment can hit the credit scorecard.

“If customers are having extreme difficulties in paying EMIs, they can opt for a loan moratorium,” suggests Pranjal Kamra, CEO, Finology. As per the rule, opting for moratorium doesn’t impact the CIBIL score.

However, one should use moratorium only in extreme conditions as the interest cost is very high in this case, and missing the repayment may land users in a debt trap.

(Also read: Is it okay to take a personal loan to pay off credit card bills)

“In case of liquidity issues, customers may alternatively opt for debt consolidation or may borrow a low-cost personal loan for repaying the credit card bills,” Kamra suggests.

Avoid withdrawing cash from credit card

Cash withdrawal through credit card is the worst option to meet expenses, according to experts. Not only is it a costly deal in terms of interest charges but there are also some other hidden charges in terms of penalty like cash advance fee, late payment charges, etc.

“Though cash withdrawal may not directly affect the credit score, the high charges attached to this may drive up the monthly payments and in case of any default to pay the minimum amount can adversely affect the credit score,” explains Kamra.

"Withdrawing cash through the credit cards attracts cash advance fees of up to 3.5 percent of the amount withdrawn along with finance charges ranging anywhere between 23 percent and 49 percent p.a. from the date of withdrawal till its repayment. Making cash withdrawals through credit card also leads to the cessation of interest-free periods of credit card transactions till the cash is withdrawn is repaid by the cardholder," adds Radhika Binani- Chief Product Officer, Paisabazaar.

Maintain a balanced credit mix of secured and unsecured loans

Lenders generally prefer lending to those having a balanced credit mix of secured and unsecured loans. Secured loans include car loan, home loan, and loan against property while unsecured loans include personal loans or loan against credit card. A balance credit mix has a positive impact on the CIBIL score.

Customers with a higher proportion of unsecured credit can either consider a prepayment of the existing unsecured loans or opt for loan consolidation, by replacing unsecured loans with secured ones, as per experts.

Keep Credit Utilization Ratio (CUR) within 30 percent

Credit utilization ratio is the proportion of credit limit utilized by customers against the total credit limit available. Banks generally lend users who maintain CUR within 30 percent. Breaching this mark may lower the credit score.

Avoid multiple loan and credit card inquiries within a short time span

Making multiple inquires for loans or credit cards also adversely impacts the CIBIL score. According to experts, one should only apply for a credit card or a loan when it is really necessary. Opening a new credit account also lowers the average credit age.

Review credit report at regular intervals

It’s important to review the credit report at regular intervals as any misinformation or error in it can adversely impact a credit score.

“Any wrong information in the credit report should be taken up with the credit bureau and the concerned lender/card issuer for rectification. A rectified credit report can automatically increase the credit score,” opines Binani.

Disclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions.

How to maintain a good credit score in times of COVID-19

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