Explained: 5 simple rules to protect credit score during coronavirus pandemic

The rules to building a solid financial background are simple — save money, minimise debts and spend only as much as you can afford. But the sharp economic downturn due the coronavirus pandemic has made these rules rather difficult to follow.

The pandemic has forced many distressed people to borrow. Some individuals have even defaulted on their debts due to the economic crisis. All these factors have negatively impacted their credit score -- a key foundation for maintaining financial fitness.

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Lets first discuss why maintaining a good credit score is important.

What is a credit score?

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

Why credit score matters?

Simply put, lenders highly consider this score when offering loans to individuals and a higher credit score also helps individuals maintain a solid financial history.

Likewise, a bad or low credit score is bad news for borrowers as lenders are often reluctant to offer loans. If they do offer loans, they are generally expensive and bear high-interest rates. Lenders often associate high risk with borrowers who low credit score.

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Generally, a credit score above 700 or more is considered good and banks will give such borrowers loans at comparatively lower interest rates. Paying less interest on loans helps individuals save more money in the long run.

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

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

Maintaining a good credit score during the pandemic

The global coronavirus pandemic has caused a severe economic slowdown and has disrupted creditworthiness of millions who have either suffered income loss or lost jobs.

But the economic slowdown has amplified the importance of maintaining a good credit score as individuals in need of money for emergencies will be able to borrow at lower interests. Here are a few simple tips:

1) Prioritising payments: The best way to protect your creditworthiness or credit score during the pandemic is to prioritise your payments. If you have multiple loans, including some with high interests, try clearing those first as they make the biggest dent on credit scores.

If you have suffered significant income loss, you should focus on clearing the high-interest debts first and then dealing with the low-interest loans. Some high-interest loans include credit cards and personal loans. So try clearing the monthly EMIs on these loans on priority.

2) Don't hesitate to ask your bank for help: This step is often ignored but is really effective. If you have been a diligent 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 are struggling to repay high-priority loans, talk to your bank to work out a restructuring of these loans and significantly lower your interest outgo. In many cases, banks will also waive late fees and offer repayment options at a lower interest rate.

So if your struggling making these payments, pick up the phone and call your bank immediately. A deferment on paying loans is much better than a late fee as it does not impact 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 pandemic-induced economic slowdown. Monitor your credit score on a monthly basis.

Credit score reports are usually generated by major credit bureaus. The CIBIL credit score is the most important one while there are others generated by Experian, Equifax, CRIF High Mark. It is important to keep a regular tab on your credit score to check for accuracy — any faulty activity could do damage to your overall score and ensure that it is accurate.

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

Failing to pay credit card EMI can result in a huge blow to your credit score. Therefore, it is advised that you pay at least the minimum due amount on your credit card to avoid any hit on your score.

Another thing you should remember during the pandemic — and even in normal situations — is to never withdraw cash using your credit card. In most cases, it leads to a debt trap and affects your credit score. If you are facing an emergency and have no savings, seek a personal loan.

5) Don’t pile on fresh debt and plan ahead: If you are struggling financially, it is necessary that you avoid piling on fresh debt as failing to repay will further dent your creditworthiness. Cut down on all unnecessary expenses before you successfully clear your pending dues. At the same time, plan a tight monthly budgetary plan to clear your existing dues and keep saving money on the side for unplanned emergencies.

And remember that the pandemic has brought the world to its heels and millions have been burdened financially due to the economic devastation it has caused. The credit score is a sign of your long-term creditworthiness and financial health, but the most important thing right now is to look after your basic needs.

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Even if your credit score takes a hit right now, do not stress over it. Build a pragmatic plan and move ahead. Seek help from banks and financial institutions. Talk to financial experts and plan ahead.