Why Your Credit Score Might Drop, Despite Paying EMIs During COVID Times?
2020 has so far been one of the most challenging years for our finances as well as health. People all across the globe are grappling to stay put under lockdown and bearing loss of income & huge disruptions in day-to-day lifestyle. The falling FD rates, loosening lending rates, downwards stocks echo uncertain future & negative growth outlook for Indian as well as global economy.
While banks have reported as much as 40% of Indian retail borrowers opted for RBI Moratorium relief, there is a large base of customers who are servicing EMIs, despite losing out business income, sleazed paycheques and forced furloughs.
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If you believe you have adopted the best of habits for good credit score and are diligently meeting out your obligations by paying out EMIs in time, it’s time you also know about the naive financial moves that may be gradually receding your score.
In this article we are going to list out situations wherein your credit score drops, despite exercising financial discipline and paying EMIs. Amid COVID Times, it is all the more important to tread carefully and protect your credit score.
Using Credit Card for EMI Payments
The much has been written about the actual cost of RBI Moratorium relief and why it is not the ‘go to’ option for managing cash flows. Many households are indeed cutting down their expenses to pay out a cluster of EMIs on time & avoiding deferment option.
While paying out EMIs will ensure that you do not escalate your debts after the Moratorium Period, one of the most common mistakes you may make at this time is using your Credit Card to pay these EMIs.
When you make a Credit Card transaction for loan payments, you are basically raising a credit for another outstanding credit account. Thus, it reflects cash constraints in your credit bureau report and raises a red flag against you. Do not pay out your EMIs through Credit Card.
Credit Card Emergency Loan
Leading lenders such as HDFC Bank offer Instant Credit Card Loan to their existing cardholders with consistent repayment history. Amid job loss, pay cut or loss of business income, it appears handy to use the Emergency Loan against your Credit Card and bridge the cash gaps however.
Hold on, before you apply for a Card Loan. Consider comparing the cost of a Credit Card Loan with that of a Personal Loan offer from the same bank. Unlike Credit Card, you will be able to borrow more, for a longer tenure and at a lower rate of interest. A Credit Card Loan thus is a costlier and short term cash gap arrangement for small cash gaps.
Furthermore, do not forget that a Credit Card payment includes 18 per cent of GST. Thus, in these times of distress, it is recommended to get your maths right before applying for a new loan. Accumulating expensive lines of credit in haste could make it difficult to service the repayments on the later date.
Also Read: COVID 19 Personal Loan in India
High Credit Utilisation Ratio
Amid severe cash crunch due to pandemic, a lot of households are using Credit Cards for vital online transactions such as child’s school fee, insurance premium, medical bills, utility bills, grocery bills etc. However it is also important to pay attention to credit utilization ratio. High credit utilisation for multiple months in the row reflects cash crunch and challenges your credit score. Make sure you use keep CUR below 50% even on these difficult days.
Missing Periodic Review of Credit Information Report
Although businesses have been hard hit across the industries due to COVID-19, you still can’t afford to sit back and miss the periodic review of your credit report. Whether you are making financial moves or not, always keep an eye on your credit report. Online fraudsters will never miss any opportunity of stealing accounts.
Update in CIBIL’s Algorithm
Your credit score may fall for no fault of yours. The CIBIL has recently updated its algorithm to assess credit scores. As a result, a lot of accounts will witness lowered credit rating. Though it has been stated by the Credit Bureau that the lenders have also adjusted their credit policy accordingly and a lowered New CIBIL Score should not impact the lending capacities of individuals.
The new rating system considers past 3 years of credit history in place of past 2 years of history in the old system. Thus if you have stumbled upon maintaining good history in the past, it may still hurt your score in the present as well. Also, the new system of credit rating evaluation considers previous trends in delaying payments, behaviour of using credit cards, and age of credit account.
The Reserve Bank of India has time and again reiterated that 6 months of loan moratorium for COVID Times will not affect Credit rating of individuals and businesses. Herein it is important to note that lenders have also said that the credit history of opting for Moratorium will be reported to Credit Bureaus so that there is no discrepancy in reporting of credit history of any account. So any delay in payments post Moratorium can hurt your score more sharply. The lenders may not be able to offer further repayment flexibility to those who have already used Moratorium relief.
Change in a mix of credit accounts & overall financial health
During COVID crisis, apart from Moratorium, many people are staying put by diluting their Fixed Deposits, using preapproved Emergency Loans, Credit Card advance and alike. This certainly has brought in an unprecedented disruption in the mix of loan accounts for many. If Unsecured Loans are way higher than Secured Loans, your credit score goes downwards. Besides the low score, lowered bank balance/ liquidated FDs will also impact your preapproved credit limit with your bank. Thus your overall credit worthiness will be down.
All in all, these are unprecedented times and hasty financial decisions can hurt your credit rating for many years to come. Use professional help before applying for loans or credit cards and make informed decisions to sail out smoothly amidst troubled waters of COVID19.
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