Considering the economic distress caused by the pandemic, it may be no surprise if one may need a personal loan to tide over a monetary crisis. But before applying for any loan, do check for the credit score since this will have a bearing on the chances of procuring the loan. At this point, one may have two queries: how to check for a credit score and how to improve it. For this, it’s first important to understand what a credit score is all about. These factors are particularly important in the post-pandemic phase since a robust score will make things easier in procuring credit.
Checking Credit Score
Be it a personal loan, business loan, home loan, car loan, or any other category, lenders will not give a credit without first checking the credit score. Therefore, checking a credit score is the first hurdle. But one needn’t worry because new-age fintech firms such as Clix Capital and other lenders help check credit score for free. What’s more, acting as a one-stop destination for all financial needs, Clix offers personalised recommendations to make better financial decisions. To begin with, a credit score is a three-digit number between 300 and 900, which reflects the ability to repay debt. This is calculated by keeping track of the payment records and whether these are on time. The number of accounts maintained by the borrower also contributes to credit score calculation. Typically, a score of 750 or higher is considered good.
The credit score assumes significance for lenders as it allows them to assess the risk of lending money to the borrowers. A high score indicates a lower risk of default and vice versa. After this is done, it’s important to keep regular track of the credit score. In case it drops below 700, one will to have to work on ensuring timely payments to improve the score. In India, four major credit bureaus track credit scores: TransUnion CIBIL, Experian, CRIF High Mark and Equifax. Clix Capital has a tie-up with Experian, through which check credit score can be checked for free. These scores are based on the financial information and records provided by banks and other financial institutions. The credit score may also play a role in calculating the amount of premium to be paid while insuring a vehicle or a home. Insurance agents create an ‘insurance score’, which is based on diverse factors, including the credit score. A good credit score can ensure lower premiums while a higher score would mean additional annual premium costs. Similarly, a good score will permit access to the best credit cards at lower interest rates and higher rewards on transactions. Anytime one has a low credit score, they should try to raise it at the earliest by repaying all their credit card dues. As credit card interest rates are extremely high, if possible, it’s best to repay the dues fully each month to maintain or regain a high credit score. If full payment is not possible, paying the maximum one can will still help in improving the credit score.
Ways to Boost Credit Score
Another way to boost credit score is to consolidate all debt. For instance, one may have multiple debts on different credit cards and from different lenders. Even if inadvertently a single payment is missed, it will mess up the credit score. To address this situation, one may opt for a personal loan to pay off all these costly debts. Now, one will have to keep track of only one EMI payment every month, which is relatively easier. Also, personal loans can be availed at a much lower interest rate compared to credit cards. Moreover, credit cards should not be used to withdraw cash. Although reward points are offered for withdrawing cash via credit cards, there are several hidden charges. These include cash advance charges, finance fees, and late payment fees. Ultimately, one could fall into a high-interest rate debt trap. This would then negatively impact the credit score.
In case of an emergency, dipping into savings or borrowing from family or friends as short-term assistance is the best. One could also take an instant short-term personal loan from Clix Capital and repay via flexible EMI options. Needless to mention, the interest rates will be more reasonable than that of credit cards. Furthermore, take a long-term perspective and begin saving some money every month for creating an emergency fund. To manage this, eliminate or reduce needless expenses, except essentials. Besides, avoid utilising 100% of the credit card limit or resorting to an overdraft. This denotes an inability to handle money. Lenders track overutilization of credit. One also needs to know about hard and soft credit inquiries. Hard inquiries occur when lenders check for the credit score before approving a loan. Multiple hard inquiries with credit bureaus can hurt one’s score as it seems one is likely desperate for a loan. Conversely, a soft inquiry occurs when one checks their own credit score or if a lender makes an offer of a loan or preapproved credit card. Naturally, soft inquiries don’t impact the score.
If there’s no serious need for a loan but it’s just interesting to click on lender apps to check out how much loan one can afford to borrow from them—please do resist the urge. “Shopping” for loans, & applying to various lenders simultaneously can reduce one’s credit score. Therefore, even when in need of a loan, finalize one or two lenders and then apply. Do not “over” apply to multiple lenders altogether. Certainly don’t apply for a loan to multiple lenders simultaneously. It’s good to have a mix of secured and unsecured credit, that could also act in one’s favour during the computation of the score. But too much of one category can upset this balance and hurt the credit score. Finally, it needs to be reiterated that timely payments of bills – credit card, loans, utility bills, and others – is mandatory for a robust credit score. Follow these guidelines to easily maintain a healthy credit score. Improving bureau score & recovering from such sudden score drops is not difficult. One has to be mindful of only 2 things – repay regularly and borrow prudently. Another way to improve bureau score is “early repayment” – if the cash flow permits, try and pre-pay loans i.e. before the loan tenure ends. This would not only save money on the potential interest one would have to pay on the loan every month, but also improve the credit score.