Importance of Being Credit Healthy during the COVID-19 Crisis

The COVID-19 pandemic has been affecting all aspects of life since its start in January 2020 and since then it has hurt human life and the economy.

With the cashflow being heavily affected in the form of layoffs and salary cuts, the demand for new credit has been on the rise and majorly in the form of unsecured loans. However, to avail these loans, having a good credit score is of utmost importance, especially during a crisis.

Apart from offering loans, banks have announced the launch of the moratorium along with various products specifically curated to help people sustain themselves during the pandemic.

Importance of Credit Score :

The credit score of a person showcases his or her creditworthiness to the bank. If you have taken a loan or a credit card from a bank, paying back the loan in EMIs or paying your credit card dues on time and in full has a positive impact on your credit score. However, any defaults missed payments, etc. can have a negative impact on the score.

In a crisis like the COVID-19 pandemic, if there is a necessity for a personal loan or other loans, having a good credit score is the most important factor. Having a credit score above 750 is ideal and below 700 is below average. Having a high credit score can often help you get lower interest rates on your loans or can also help you choose your desired tenure and amount of the loan as well. However, having a lesser score reduces the chances of these options.

Hence, to avail any of the products launched by banks to help customers during the pandemic, your credit score must remain steady.

Impact of Moratorium on your Credit Score :

According to the Reserve Bank of India, a moratorium on EMIs and credit card balances was given to borrowers until 31 August 2020, in their last announcement. This would mean that borrowers can choose the moratorium and not pay their EMIs or credit card dues until the above-mentioned date.

However, the question comes if opting for the moratorium would affect the credit score. Choosing the moratorium will not have a direct effect on your credit score as according to the RBI directive, the deferment of payments will not be considered as defaults. Even though you will not have to pay the EMI or credit card dues, the interest accrued during the moratorium period will have to be paid after.

Hence, it is important to understand that a moratorium should be opted for only if there is an emergency and the payments cannot be made.

Maintaining a Healthy Credit Score during COVID-19:

With the COVID-19 crisis getting bigger by the day, it is advised to maintain a healthy credit score to secure funds whenever required. To do so, here are a few ways by which you can maintain a good score:

• Keep a regular check on your credit score:

  During a time where income can fluctuate due to salary cuts or layoffs or even cuts in increments, it is important to know where your credit score stands regularly. Given that your expenses will be reduced, keeping a check on your score can help avoid major discrepancies, if any.

• Paying off credit card debt:

  Paying your credit card balances whenever possible is of utmost importance during a crisis. If ignored, the debt increases and so does the interest accrued on the balance which may difficult to repay later. Any kind of late payment can affect your credit score.

• Opt for the moratorium only if necessary:

  Given that the interest accrued during the moratorium period will have to be paid, it is advised to opt for the moratorium only if there is an emergency such as a halt in regular income or if there is a shortage of funds to meet essential requirements.

• Avoid withdrawing cash from a credit card:

  Even though it is an option, it is advised not to resort to credit card withdrawals during this crisis as this comes with many additional charges which include cash advance fee, additional finance charges along with late payment fees as well. It also affects your credit score to an extent as repayment of the advance amount comes with a separate and higher interest rate.

• Keep the credit utilization ratio below 30%:

  Banks prefer lending to borrowers who maintain a credit utilization ratio of below 30% of their credit limit.

As the COVID-19 pandemic enters into the eighth month of the year, the financial crisis along with the health crisis has been termed the worse in many years. The financial health of many has been hampered to a great extent along with any economic goals they had planned during the year. Repaying existing debt and maintaining the stability of your finances will be the key to come out of this crisis without any adverse effect on your financial health.