The onset COVID19 pandemic has led an abrupt halt of all economic activities followed by a series of national lockdowns, newly introduces norms of social distancing that have jolted financial planning. The extended uncertainty, unprecedented layoffs, and salary cuts have strained households largely. During this ambiguous situation that we are all going through, it is important to maintain a wholesome credit score.
Know your Credit score
A credit score is a scale to measure how creditworthy one is or the business is while being given a loan. These scores are curated and conferred by credit rating agencies by taking into account all essential factors when it comes to lending such as repayment capacity, credibility, previous defaults, write-offs, and so on. In short, while analyzing the credit score the lender gets an approximate idea of the amount of risk they are undertaking while providing loans to clients. It is a three-digit number ranging from 300 to 900. The acceptable range for SMEs is anywhere between 700 to 900, 700 being a decent score and the nearer towards 900 can help the SME enjoy certain special privileges such lower interest rates, the longer duration for repayment, bigger loans, and so on. Regular repayment of loans can help to boost the score. In the backdrop of the pandemic, RBI has extended a 3-month moratorium for repayment of loans without affecting the credit score.
Payoff your debts
Debts planned properly, can result in financial advantages. It is important to plan a strategy for paying off debts by considering the principal amount and interests. Adopt a systematic strategy that harmonizes your needs and in an ideal scenario, all outstanding amounts should be one-third of your income. First and foremost, evaluate the total debt and rank them according to interest rates and outstanding amounts.
Credit card interests are among the highest thus making credit card debt the most expensive. It is opined to pay off credit card debt fully to maintain a good credit score.
In case of being in a financially tight position, at the least pay the minimum amount to keep the account in a standing position and avoid late fees, Maxing out a single credit card impacts your credit score drastically.
Debt management plan
While paying off debts at regular intervals, if you have the slightest doubt of defaulting a payment, it is advisable to consolidate debt as defaulting EMIs have a negative effect on credit score. A DMP (Debt Management Plan) is desirable in such cases of uncertainty. By consulting, banks or NBFCs devise plans to consolidate multiple payments into one repayment scheme by setting an achievable tenure plan.
Structure your credit and pay all your bills on time
Secured loans include car loans, home loans, mortgages and require collateral whereas unsecured loans such as credit card, personal loans do not require collateral. By having a mix of both secured and unsecured loans, helps you maintain a reasonable credit score. One of the most essential conditions to maintain a good credit score is to pay all bills on time. Any delay in payment can drop your credit score and rebuilding a poor credit score takes a considerable amount of time. On having multiple payments on credit card bills and EMIs on term loans, set reminders, or opt for auto-debit from your bank accounts.
Avoid the usage of a credit card to withdraw cash
By doing so you are unlocking several hidden charges such as advance fees, finance charges, etc, all of which add up to the repayment amount. Many credit cards offer rewards point for doing so, but financial advisors like MoneyTap speaks against it. Ultimately it leads to higher interest rates and affects your credit score majorly. It is always advisable to have an emergency fund created by cutting out on unnecessary purchases, as it comes handy in times of a crisis.
