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How to keep up your credit score during a crisis

If finances are tight, it’s time to get strategic. In times of COVID, understanding how credit scoring works can help you keep up your credit score. A good score in turn keeps the credit line open, while allowing you to borrow at cheaper rates, if need be.

What’s a credit score?

Credit score is a summary of your credit history and it ranges anywhere from 300 to 900. A score above 750 can help one avail credit at competitive rates from lenders. CIBIL, Experian and Equifax are among the popular credit bureaus in India that provide individual credit reports.

How does scoring work?

Credit bureaus typically look at four factors while giving a credit score. Payment history on your debt obligations (defaults or late payments, if any) comprises about 30 per cent of overall weight. Type of loan availed whether secured or unsecured loan and the duration of credit history established contributes another 25 per cent to the score. Total credit exposure (in amount) is another 25 per cent, while other factors including credit utilization and recent credit behaviour contribute the rest.

Following are the ways to maintain credit score in times of COVID:

Pay on time

Promptly repay your credit card dues and EMIs by setting alerts and reminders. Doing so for a year or so often improves your score, even if you have defaulted on past payments.
If you have multiple cards and are unable to pay the entire dues, at least pay the minimum amount due (usually five percent of overall dues) on all your cards. It is better (from a score perspective) than paying some card dues and defaulting completely on the rest.

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Use emergency fund

If you are facing liquidity problems, tap into your emergency fund. It will help wade through the crisis and not let you default on credit repayments. However, ensure you replenish it, once the situation improves.
Keep low credit

Duration of credit history matters in scoring. So, ensure you don’t close your credit card, especially those with a long payment history.

Also, use your savings to pay as much as credit as possible and borrow only if necessary. It will keep overall indebtedness to the minimum (which is viewed favourably by the credit bureau). Moreover, ensure you resort to lesser credit utilization – 30 per cent or lesser.

For instance, if you have two credit cards with credit limits of Rs 40,000 and Rs 60,000 respectively, ensure credit outstanding balance on these two cards doesn’t cumulatively cross Rs 30,000 (30% of Rs 1 lakh).

Also, it might be prudent to ask for a higher credit limit from your credit card company, even if you don’t need it. It will automatically reduce your credit utilization levels.

New credit nuances

Duration of credit history matters in scoring. So, ensure you don’t close your credit card, especially those with a long payment history.

However, if you have not taken a credit card or any other loan, consider buying a credit card (keeping mind your income and needs). It will start building your credit history. Buying a new card can impact your score depending on circumstances. While it could lower your credit utilization limits, it can also lower your overall credit age.

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Healthy credit mix

Credit could be either secured (such as home loan, car loan) or unsecured (personal loan, credit cards). It is prudent to have a healthy credit mix – too many unsecured loans may be viewed negatively by the credit bureau.

Watch your behaviour

Moreover, there are points for enquiries (including credit card application) requested by lenders regarding your credit details. Multiple enquiries in a short span of time (an indication of seeking excessive credit) are viewed negatively by the credit bureaus. Such credit behaviour is tracked for a period of seven years.

Address discrepancies

You can check your credit score for free from a website of a credit bureau, while the credit report might be chargeable. The individual credit report contains full details of one’s credit outstanding and debt written off or settled in the past (including suits filed). The latter is not viewed favourably by the credit bureaus.

Check, if outstanding figures are up-to-date and accurately reflect your debt history. Any discrepancies need to be pointed out to the credit bureau promptly.

Takeaway

Paying dues on time, maintaining healthy credit mix and keeping credit utilization low can keep up your credit scores high – in times of crisis.

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