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But if you take a car loan for a short duration, the EMIs will be heavy and non-payment will mean a blot on your credit report. Photo: iStock
But if you take a car loan for a short duration, the EMIs will be heavy and non-payment will mean a blot on your credit report. Photo: iStock

Credit score hit due to covid-19? Five ways to improve it

  • Many banks offer lower interest rates to borrowers who have a higher credit score. For example, Union Bank of India provides the best home loan interest rate to borrowers with a credit score of over 700

NEW DELHI: Many borrowers have suffered financial stress due to the coronavirus pandemic. There were salary cuts, layoffs, and businesses were shut. Some have failed to repay loans and credit card dues regularly after the end of the moratorium. Consequently, their credit scores took a hit.

According to a 2020 report from BankBazaar, the number of people checking their credit report has risen. Besides being a marketplace for financial products, Bankbazaar also offers free credit reports to its users.

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According to TransUnion CIBIL Limited, 42% of borrowers have a credit score between 300 and 747. These are the borrowers whose data is available with the credit bureau. About 41% have credit scores between 748 and 777. Only 17% of borrowers have credit scores over 778.

Many banks offer lower interest rates to borrowers who have a higher credit score. For example, Union Bank of India provides the best home loan interest rate to borrowers with a credit score of over 700. It levies a risk premium on those with credit scores between 600 and 700. If a borrower has a score below 600, many banks may even reject a loan application.

If your credit score took a beating due to the financial crunch caused by the pandemic, here are a few ways to improve it.

Review Report

The first thing to do is to review your credit report. Look at the areas which need improvement. Mistakes in credit reports are not uncommon. They could happen when banks are reporting your data to credit bureaus. It's also possible that you could be a victim of identity theft and someone else has used your credentials to avail loans fraudulently. Get error rectified.

Track Record

Your credit score won't improve unless you are regular with your payments. Finish off small-term and unsecured loans first.

Lenders don't just look at the score when taking a call on loan or credit card application, they assess multiple parameters such as credit history, current income, and outstanding credit. Work on improving these.

Make sure all loans that have been repaid are closed. If not, ask the concerned lenders to close them and provide closure letters.

Credit Utilisation

Check credit utilisation in the credit summary of your TransUnion Cibil report. Ideally, your credit utilisation should be around 30-35%. Try to bring it down to at least below 50%.

Multiple Applications

Every time you apply for a loan, the lender checks your credit score. It leaves behind what is known as a credit application search footprint on your score when it does so. Each time this happens, your credit score takes a small dip. Space out your credit applications, as this could signal to lenders that you are under financial stress.

Loan Mix

To build a healthy track record, opt for secured loans. You can even get a credit card against a fixed deposit. Avoid unsecured loans such as personal loans as much as you can. Lenders will view a borrower risky if he has more unsecured loans.

If you have defaulted on repayments and continue to face financial stress, the process could take time. But once you get regular with repayments on outstanding dues, you would see your score will start improving every quarter.

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