The rules for building a solid financial background are simple: save money, minimize debt, and spend only what you can afford. But the severe economic recession due to the coronavirus pandemic has made these rules quite difficult to follow.

The pandemic has forced many people in distress to borrow. Some people have even defaulted on their debts due to the economic crisis. All of these factors had a negative impact on their credit rating, a critical foundation for maintaining financial health.

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Let’s first see why maintaining a good credit score is important.

What is a credit score?

A credit score is a number that describes the creditworthiness of a borrower or an individual. A higher credit score will result in better deals on loans at lower interest rates. It is determined by the total number of accounts opened, debt levels, repayment history, and a few other factors.

Why is credit score important?

Simply put, lenders take this score heavily into account when offering personal loans, and a higher credit score also helps individuals maintain a strong financial history.

Likewise, a bad or low credit rating is bad news for borrowers, as lenders are often reluctant to offer loans. If they offer loans, they are usually expensive and carry high interest rates. Lenders often associate high risk with borrowers with low credit scores.

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Typically, a credit rating of over 700 or higher is considered good and banks will provide loans to these borrowers at comparatively lower interest rates. Paying less interest on loans helps people save more money in the long run.

According to a number of financial websites, any credit score above 750 is considered very good. Anything over 800 out of a total of 900 is considered excellent and greatly increases the chances of getting loans at lower interest rates.

However, anything below 600 attracts slightly higher interest rates. But if your credit score drops below 400, there is cause for concern as lenders may even want to sanction a loan.

Maintain a good credit rating during the pandemic

The global coronavirus pandemic has caused a severe economic downturn and disrupted the creditworthiness of millions of people who have suffered loss of income or lost their jobs.

But the economic downturn has amplified the importance of maintaining a good credit rating, as people in need of emergency cash will be able to borrow at lower interest rates. Here are some simple tips:

1) Prioritize payments: The best way to protect your creditworthiness or credit score during the pandemic is to prioritize your payments. If you have multiple loans, including some with high interest, try clearing them first as they make the biggest impact on credit scores.

If you have experienced a significant loss of income, you should focus on paying off high interest debts first, then low interest loans. Some high interest loans include credit cards and personal loans. So try to clear the monthly EMIs on these loans as a priority.

2) Don’t hesitate to ask your bank for help: This step is often ignored but is really effective. If you’ve been a repeat borrower throughout your financial life and have a good relationship with your bank, 9 out of 10 times the bank will understand if you discuss your problem with them.

If you’re having trouble paying off senior loans, ask your bank to work out a restructuring of those loans and dramatically reduce your interest expenses. In many cases, banks will also waive late fees and offer repayment options at a lower interest rate.

So if you are having trouble making these payments, pick up the phone and call your bank immediately. A deferred loan repayment is much better than a late charge because it doesn’t affect your credit score.

3) Keep track of your credit score: This is another simple exercise that will help you protect your credit score during the economic downturn brought on by the pandemic. Monitor your credit score on a monthly basis.

Credit score reports are usually generated by major credit bureaus. CIBIL credit score is the most important while there are others generated by Experian, Equifax, CRIF High Mark. It’s important to keep an eye on your credit score for accuracy – any faulty activity could damage your overall score and ensure it’s accuracy.

4) Pay off credit card debt: If possible, never default on credit card payments. Not only do they have the highest interest rate, but they also come with high late fees.

Not paying EMI by credit card can be a big blow to your credit score. Therefore, it is advisable to pay at least the minimum amount owed on your credit card to avoid any impact on your score.

Another thing to remember during the pandemic – and even in normal situations – is to never withdraw money with your credit card. In most cases, this leads to a debt trap and affects your credit score. If you are faced with an emergency and have no savings, apply for a personal loan.

5) Don’t accumulate new debt and plan ahead: If you are having financial difficulties, it is necessary that you avoid accumulating new debt, as failure to repay will further affect your creditworthiness. Cut down on all unnecessary expenses before successfully settling your pending contributions. At the same time, plan a tight monthly budget plan to settle your existing dues and continue to save money for unforeseen emergencies.

And remember the pandemic has put the world on its heels and millions of people have been financially burdened due to the economic devastation it has caused. A credit rating is a sign of your long-term creditworthiness and financial health, but the most important thing right now is to take care of your basic needs.

Read also | Coronavirus: Economic Downturn Leaves Budding Indian Middle Class in Limbo

Even if your credit score is taking a hit right now, don’t stress out about it. Build a pragmatic plan and move forward. Seek help from banks and financial institutions. Talk to financial experts and plan ahead.

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