These are testing times for all of us. The prevailing situation of COVID-19 has pushed all plans to corner and we are staring at uncertainty in almost everything, this seems to be the new normal. Problems never come alone, with the slump in economic activities and business outlook, salary and overall earnings, financial discipline is of paramount importance today. Due to the lack of liquidity options, we are sometimes forced to consider means that are beyond our comfort level and affordability but are still essential and required. In this article, we shall try to cover the most suitable approach to be steadfast in these times while keeping a very close watch on your credit score and financial independence.
In plain summary, credit score provides a numeric summary of your entire credit history in three digits. CIBIL is the most common credit bureau that provides individual credit scores for consumers. The value ranges from 300-900, where 300 is the lowest score and 900 is considered the best score. Any credit score above 800 is considered very good and indicates that you have good control over your borrowing habits and have a clean and proven history of credit.
Below, we shall discuss a few pointers that will help you maintain and control a good credit score. The first step towards maintaining a good credit is to understand how it behaves and what impacts it the most.
Basics of credit score
It is vital that you understand the parameters of a good credit score and ensure that you do not make any compromises. A credit score is composed of different types of debt and your history of maintaining & servicing them which broadly determines your credit score. Anything from a personal loan to an auto loan or a home loan will get reflected here. Although the credit cards are unsecured debts, but they still constitute a vital part of your credit score. A credit score is calculated on your discipline of timely payments, your debt to income ratio (calculated as the total income over the year and loan liabilities against it) and your history of servicing existing and past debts.
If anyone has never taken a credit or a loan, it does not mean that they will have an optimal/high score, as the lending agencies/authorities have no way to objectively judge their financial discipline to repay or their capacity to service a debt, the creditors are often hesitant in lending to such borrowers. In case of debt defaults, the whole system works the other way around, defaults, if they stay on your credit report, will be detrimental to your future prospects of getting a credit/loan.
Manage your debt
Managing your debt is vital to maintaining a good credit score. Every missed payment against your debt will negatively impact your credit score and due to this, debt servicing & management must be your top priority. Not all types of debt become a part of your credit score, so you need to be clear on what is your priority when it comes to servicing your debts.
For instance, paying your outstanding vendor debts/family or friends’ loan might not influence your personal credit score while it may reflect on your credibility. So, your monthly pay out strategy should carefully balance servicing credit card/loan debts and your other liabilities accordingly. In case, you are falling behind on your overall liabilities, it is advisable to buy some time from the vendors/friends’ or family and focus on getting current in your payments for your collateralised or non-collateralised debt from an institution.
Pay Credit Card bills on time
Every credit card bill that you fail to pay on time will negatively impact your credit score. Ensure that you pay the EMIs or outstanding bill before the due date. Whether you own a business, or you are employed, keep a close eye on your cash flow and ensure that you keep paying your institutional credit on time. Plan your payments so that you clear those debts which influence your credit score first and then focus on the other dues.
Also, remember that there are two vital components when it comes to clearing the credit card bills – the minimum due payment and total payment. Whenever you pay the minimum and not the total due on your credit card, the outstanding amount with any new transaction that you make on your card will accrue an interest, while it may be okay for one or two instances, but repetition of this will cause your credit score to dip in the long term.
Never withdraw cash using credit card
This is one mistake that many do without thinking about the consequences it will have on the credit score. Withdrawing cash from credit card is very costly as the interest charged in this case is extremely high when compared to interest charged for purchases.
Also, when you take cash advance from credit cards it does not give the lenders a good impression of you. It shows that you are desperate for money which is never a good thing for your credit score.
Be careful with applying for new credit
Another point to note here is that if you are thinking of applying for new credit then be rational about it. Credit raised beyond the need is imprudent. This alters the debt to income ratio with unnecessary interest charges, and every credit check the lender will make on your request will influence your credit score.
Similarly, keeping too many credit cards just because you like it, is also not a good idea. Credit cards are unsecured loans and it is not advisable to garner this potential debt frequently or beyond requirements. Make it a point to keep a healthy mix of secured loans (car loan, etc) and unsecured loans (credit card, personal loans) while keeping a close watch on your debt to income ratio.
Watch your Impulse Swipes
A credit card has immense purchasing power and due to this credit utilization can be much more than you really require. An increased credit utilization will raise the debt amount greatly and due to this. it leads to a situation of possible default by the borrower. This will in turn reduce your credit score. Hence, it is preferable to maintain the credit utilization ratio in a third of the offered limit. If you maintain this ratio, it will help you control your debt and aid you in paying your dues with ease.
Monitor joint and guaranteed accounts monthly
You are equally liable for co-signed or joint accounts. So, it is very important that you monitor such accounts as your joint holder’s negligence can affect your ability to access credit when you require it.
Avoid making too many credit enquiries
When applying for new credit, please ensure that you don’t overdo it. When the application gets rejected at the lender’s end this will put a negative impact on your credit score. If you keep on applying after rejections it will surely bring down your credit score.
Review your credit history frequently
Keep checking your credit score every 4 to 6 months as this will help you to keep a control over your credit worthiness. You can avoid disagreeable surprises like rejected loan applications or a missed payment by mistake that might accrue interest or will keep pulling your credit score down.
If you maintain a good credit score, it will help you in accessing credit with ease whenever you require it in times of need, today or in future . Maintaining a good credit score is easy when you are cognizant of few basic factors listed above. Commit to take care of your financial health today.
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