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How Can We Shield Our Credit Score During Quarantine?

by Melanie Peterson
The credit score is calculated by credit bureaus on the basis of information they receive from banks and financial institutions about the borrowers. It is a three-figure numerical expression of how well an individual is handling his/her credit. Generally, the credit score ranges from 300 to 900. It is calculated on the basis of multiple factors like regularity of monthly payments, credit mix, frequency of new credit enquiries, amount of loan outstanding and the extent of credit limit utilized.

Currently, the world is under the havoc of Coronavirus, which caused a global pandemic. Many economic activities have come to a halt or have reduced significantly. Businesses are shutting down, and many people are losing their jobs too. In such a situation, maintaining consistency in credit repayment is not an easy task. There is a lot of uncertainty with regards to the future job situation, financial situation and income. In these situations, it is reasonable to prioritize the basic needs and spend only on things that are essentials for the living.

However, on the flip side, when you miss your monthly obligation to repay your credit card bill or loan EMI, the repercussions of such an event is likely to only add more trouble in your life. The late payment of a credit card bill will attract a late fee which is considerable, and if it’s the EMI then too, late fee or penalty will be levied. Not only this, but another negative impact will be on your credit score, which will start going down.

One solution for this problem is to enrol for the Moratorium scheme, which in effect from March 2020 to May 2020 in all banks as per the advice of RBI. Under this scheme, the EMI or monthly obligation for 3 months will not attract any late fee or penalty in case they are not paid. However, there’ s catch in this scheme. For all those who enroll under this scheme, the interest for the months of March, April and May will still incur on the outstanding balance and the tenure of the loan will be extended by 3 months. This means that even if you do not pay during March, April and May, the interest will still continue to add on your debt and your debt’s tenure will also increase. So, basically under this scheme, your overall debt will only increase, but you would be able to shield your credit score from getting negatively affected due to your non-payment of the monthly obligation.

Another scenario in this situation is that what happens if you continue making timely payment of your obligations? In case your income is not much affected then it is for the best that you continue paying EMI or settle your credit card because opting for the moratorium scheme is not a beneficial option in the long run. Right now, the market is done and uncertain; the interest rate on various safe investment instruments like FD is running low. Therefore, if you are thinking of investing your money instead of paying off your dues, then the risk is too high as compared to possible rewards. Even in the case of shares, since no one can say for sure what is to come even in the next month or so, the hope of earning returns in one or two months is minimal. Although, there is a high chance that you might just lose all the money you invested in it.

Thus, whatever option you choose, it has to be on the lines of balancing the current situation and the future possibilities. The credit score is an important part of your financial health; therefore, you do not want to neglect it entirely as you may require it any time. Also, having credit on your head is always a burden which should be laid off as soon as possible. So, make sure the step you take is from a proper assessment of the situation instead of from panic of the current situation and worst expectation.

Protecting our credit report during the pandemic is considered to be our responsibility. With the advent of technology, things have become easy, and we can adopt the medium of online payment. The best tip to be followed would be to contact the banks that carry the mortgage, loan, pending credit-card payment or any other form of debt. Beware the bank about the rate of falling. Ask for help from the banking executive and agree.

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