The pandemic has had an impact on credit health. Last year, the Reserve Bank of India provided borrowers the option to defer their loan payments. The ensuing moratorium and loan restructuring options given to borrowers did ease the immediate burden of EMI payments. However, it also had an impact on the credit scores of borrowers.

Those who had availed of a relief on their loans had their credit histories marked to reflect this. In the eyes of credit bureaus and lenders, these borrowers thus became high-risk as there was now a question mark over their repayment abilities and their creditworthiness.

It now seems that the worst of the pandemic has been reined in and economic activity is regaining strength. And it’s also now time to assess one’s credit health. If it is weak, one must work on improving it.

What our data found

In a pan-India survey of salaried professionals between the ages 22 and 45 conducted by BankBazaar, we found a lack of awareness of one’s credit health. Of the respondents, 88 per cent said they currently had some form of debt such as home loan, credit card dues, or gold loan.

Nearly 41 per cent said their loan payments used up 20-50 per cent of their monthly income. Thankfully, 87 per cent were aware of their credit score, and 89 per cent said they had even checked their score.

Yet 27 per cent said they didn’t know their credit score impacts their loan interest rate (37 per cent in Calcutta), and 39 per cent (a similar percentage in Calcutta) didn’t know that opting for the moratorium would hurt their score. Further, 30 per cent (27 per cent for Calcutta) said they didn’t know a restructuring could hurt their score.

Clearing your dues

To cut a long story short, there’s no way around one’s dues. The simplest — and in this case, also the toughest —way to get your credit health in shape is to clear off your dues. Nothing else would have a higher positive impact on your credit score.

As some borrowers may have ongoing challenges with loan payments, creating a plan and setting aside savings for clearing their dues would help. Mounting credit card dues are also problematic — this is a costly form of debt that compounds rapidly at 3-4 per cent per month. If you have card dues, it would be wise to avoid further use of your card and work on payment. This would improve your credit utilisation ratio and later your credit score.

Delay your loan application

People with loan-related problems are often the ones in need of further credit. This is a vicious spiral pulling the borrower deeper into debt.

While this may be difficult, it would be wise to avoid fresh loan applications and work on clearing off existing dues through the means available to the borrower — for example, liquidating an asset to raise cash.

Each new loan application leads to a ‘hard’ credit score check by the lender who wants to investigate your credit history. Each such check lowers your credit scores slightly.

Therefore, making several loan applications while you’re already in poor credit health could cause further damage.

Second, when you seek a loan with a bad credit history, you’re likely to be charged a high rate of interest, because you pose a higher risk to the lender. If you must take a new loan, a secured loan may be preferable since it can be taken against a collateral such as gold and would attract a relatively lower rate of interest than an unsecured loan.

Concurrently, take steps to get your credit score above 750, from where you’ll start getting loans at reasonable rates again.

Maintain old credit lines

This may sound counter-intuitive but having a long-standing loan account up to standard is good for your credit health. For example, you may have held a credit card for the last 10 years or have a home loan going on for 15 years. The existence of these ongoing dues indicates that you’ve been able to keep up with your payments over a long period, which makes you creditworthy.

In the computation of your credit score, the age of credit lines plays a moderate role. Therefore, if you can, at a time you’re looking to improve your credit score, avoid cancelling credit cards and resume making timely payment of EMIs, which would help your score tick upwards.

Keeping track of your score

Once you start using a credit card, take a loan, or get into any borrowing-related problems, it’s important to track your credit report every month.

Credit score checks are free, and you can get them online in a couple of minutes. This will allow you to see how your credit behaviour is impacting your credit score. Any payment delays, burgeoning debts or defaults would show up immediately on your report and have a negative impact. Conversely, timely and regular payments on your credit lines would gradually improve your score. But first, you need to know where you stand.

The writer is CEO, BankBazaar.com