Traditionally, there was a lot of stigmas associated with being a borrower. Today, borrowing is not just seen as a tool to create assets, also a way to dignified living in times of crisis. The options of availing credit at the click of a button too have emerged.
But the journey of a borrower is strife with several risks. Interest rates swelling over a period, future loan rejections, appearing credit hungry through multiple loan applications in short period or even a period of income loss when you just cannot repay a loan.
Of all the risks that borrowers grapple with, actions that lead to a low credit score harms them the most. A reasonable credit score is crucial as your ability to borrow is dependent on your credit score. However, often borrowers are unaware of the behaviour that leads to a low credit score.
A credit score is a rating given to an individual based on information collected by credit bureaus from lenders pertaining to the monthly repayment of loans and credit cards. Lenders in turn use these records to evaluate and approve fresh loan applications. A credit score is in the range of 300-900. A credit score of 300 is considered the lower end of the spectrum while that closer to 900 is ideal to fetch a loan or a credit card.
It is an indicator of how an individual is likely to make timely repayments of a loan based on the income levels, number of loans, types of loans, geography and the loan and card repayment in the past.
Let us demystify the financial risks and understand how you can combat them to maintain a healthy credit score:
Data-accuracy: Ensuring that all the data provided in your credit report by lenders is accurate and updated should be your first step. A copy of your credit report can be accessed once a year free of cost through the credit bureau. Check if all loans that have been repaid completely appear as closed. If you find any discrepancies, then raise a dispute with the credit bureau or the lender and request a correction.
Missing repayments: Paying off loan instalments and card bills on or before the due date form a significant part of your credit score parameter. Ensure you do not go overboard with festival purchases and family events, leading to a credit card bill that is too big to handle. If the payment burden swells, repayment gaps are bound to surface. Later, set up automated payments so that payment dates are not missed.
Being a guarantor for multiple loans: While one should never suffer for a mistake of others, there are times when a small action done in the past can pinch your present. The inability of another person to repay his loan can affect your credit score if you stand as a guarantor for the said loan. So, unless you can assure someone would repay a particular loan or you yourself are interested in repaying the loan taken by him/her, avoid signing off as a guarantor for a loan.
Avoid excessive borrowing: Loans shouldn’t be looked at as a means to fund purchases. Borrow only when necessary and only the required loan amount. Undertaking many loans can dent your credit score as it translates into numerous chances of missing a repayment instalment. Financiers and banks view a person with a high proportion of unsecured loans – such as credit cards, personal loans or even peer-to-peer lenders – as a risk. A healthy mix of loans taken against collateral and unsecured loans is preferable if you need to borrow.
Loss of income or revenue: To tide over financial emergencies during dull economic phases, ensure that you reserve adequate money to build an emergency fund during the booming days. This savings pool created during the flourishing days can help you make timely payments during a slump.
But if you have not saved for the rainy day then sit across the table with your lenders and request them to restructure the loan by increasing the loan tenure and reducing the EMI. Ensure this reduced EMI is paid in time.
Access to funds in times of need is an important financial requirement. Avoiding these risks ensure that your eligibility for such funds is maintained. A bad credit score can lead to higher interest charges or rejection of your loan application.
Awareness is the first step to financial wellness and now you know the behaviour that can win the trust of your bank or financial institution for healthy finances.
The author, Wilfred Sigler is Senior Director – Market Development and Digital Solutions at CRIF India. The views expressed are personal