Credit worthiness is the extent to which you are considered suitable to receive financial credit, it is often based on your reliability in paying money back in the past. It is basically a measure of how much should your Creditors trust you. In India, the primary indicator of credit worthiness in all cases is your credit score (e.g. CIBIL Score). Your credit score is based on multivariate factors but most importantly the financial discipline displayed in the past.
In cases where owing to hardships, the debt is not paid back in time, every instance drops your credit score by a few stipulated points. An unattended credit i.e. a loan default or credit card default can severely impact your score, leaving your unworthy of credit in future.
Why Credit Worthiness is Important?
Most often than not, in our times of need and availability of ton of credit options, we turn towards credit cards or personal loans to attend to the need of hour. Credit products are great options while you plan for a new house, aspirational purchases, new vehicle, marriage, a great holiday and in some cases tending to an emergency. While taking credit is a natural financial behavior in most developing and developed economies, it is a strong tool that can push the way forward for one’s financial future.
While facing hardships and missing few repayments is a likeable scenario for many, coming back to financial discipline quickly comforts the credit score. However, in many cases, the problems keep spiralling and the missed payments go beyond the level where coming back to financial discipline seems very tough. In such moments of crisis, we succumb to the situation and stop paying altogether. Pressure from financial institutions makes the problem complex and we decide to completely let go of the liabilities of debt and let it manifest.
In such cases, the credit scores take a toll and keep dropping. As the bad situations don’t last forever, when we come out of it and have some financial comfort and look forward to building great things personally and professionally, taking credit/loans come as a natural choice.
It is in those times that we realize our unresolved debts and the dent they have caused over the time. A lack of credit worthiness stalls the future plans and personal/professional aspirations and growth that one could have achieved with credit products in that situation.
Can you give an example of Credit Worthiness?
Let’s understand the scenario with an example. Take a look at Mr. Joe, He was 24 years old when he graduated from a respectable school and got his first job. Financial freedom at young age is transformative and empowering. Mr. Joe received the first credit card along with his salary account. As a planner, Joe always made sure that he utilized only 30% of the credit available to him and paid back in time. Over the months, his credit worthiness was in best of the shape. One evening, while in a get together, few friends make an impromptu plan to fly to Maldives and spend some time together. Joe, was fairly excited on the idea, while the savings were not enough to pay for once a lifetime trip with friends, he turned to his credit and utilized 80% of credit. Fair use of a product, no problem.
Now, when Joe was back and the last date of the payment for credit card dues approached, he realised that he was disciplined to handle the credit dues of 30% of his card, but not 100%. He could not take out money from his regular expenses and paying all in one go was not feasible. Joe decided to pay the minimum and try to catch up next month. The approach was novel; however, the spiralling outstanding could never be completely paid off. After 3 months of maximum efforts, Joe gave up. He never settled the outstanding, ducked the creditor calls and made sure to stay low for some time.
Fast forward 5 years, Joe forgot the incident, got married and has a job that pays him handsomely. It is time to invest in home and upgrading the car! Joe considers the decision and approaches a financial institution for a home loan. Looking at his current income, he is well eligible for a decent credit, however he gets a decline on the application. The unattended old debt has rendered his credit score unsuitable for availing any further credit/loans.
Such situations in the need of hour can unsettle major life decisions for many, and it is in these moments of crisis that the credit worthiness is the most important aspect.
Is Debt Settlement the only option to get back on track?
No, in the circumstance where you are behind by couple of months on your payments due to unforeseen emergency, we strongly recommend you correct the course and get back to financial discipline. You may incur some late payment charges/interest and slight erosion on your credit score but it can be won back with regular payment schedule on your credit. In such a case, you won’t need any settlement program.
However, if the hardship has lasted longer and the total debt has swollen to a significant amount due to the compounding effect of interest and fees and you do not have one-time payment of the outstanding balance, Debt Settlement is a very effective tool to get disciplined, eliminate your debt in programmatic manner and regain your credit worthiness.
So, in case you are going through a hardship and have accumulated debt, speak to one of the trusted debt counsellors who can help you with the options to resolve your debt.