Money
How a single late payment can decimate your credit score
Summary
- It takes time a build a good credit score, but just one slip-up to undo all that effort. Here's how you can ensure a healthy score.
A man named Syed was flying overseas for a holiday when bought a book for ₹250 at the airport using his credit card. His credit card bill was generated while he was abroad, and soon they payment was due. But Syed couldn’t access his payment gateway while abroad and missed his payment.
What a seemed like a small miss had serious consequences. His credit score fell from 844 to 776 in the first month. He returned to India and paid his dues along with a penalty of ₹300 plus interest and GST. Despite this, his score fell another 49 points to 727 the next month. That single late payment had taken 117 points off his credit score.
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But Syed’s troubles didn’t end there – he had been looking to take a home loan. With a credit score of 844 he would have bagged a ₹50 lakh loan at 8.60%. But at 727, the best rate got was 9.30%. The difference in the interest due over 20 years was ₹5.40 lakh. While Syed could refinance to a lower rate once his score improved, he was stuck with the higher rate until then.
Nowadays, interest rates on loans are closely linked to your credit score. It’s thus important to know what your score is and to how keep it healthy.
Track it every month
You can ensure your credit score is healthy only if you know what it is and how it’s trending, so make sure you track it every month. There are four credit bureaus in India, all of which update your credit history once a month. You can download a free full credit report from each bureau once a year, under the RBI’s rules. Some fintech companies offer unlimited free checks.
Also read: Doctor wins ₹2.6 lakh compensation: Why regularly checking your credit score matters
But what’s a good credit score? According to one bureau, a score of 300-680 makes you a ‘sub-prime’ borrower; 681-730 is ‘near-prime’, 731-770 ‘prime’; 771-790 is ‘prime-plus’; and 791 onwards is ‘super-prime’. Most lenders prefer prime borrowers with a score of 750 or higher, though lenders prefer a higher benchmark of 800-810. Having a score above 810 is great, but of little consequence to most lenders. Essentially, ‘prime’ is the benchmark you must to hit while ‘super-prime’ is what you should aspire to.
Also read: From CIBIL to banks, different ways to access your credit report
Don’t be late
The single-most important thing you can do for a healthy score is pay your EMIs and credit card dues on time. It’s that simple. Always pay on time and your score will soon cross 750. If you tend to be forgetful, automate your payments. In Syed’s case, the size of the debt didn’t matter, and neither did his high income or spending power.
Use a credit card
Credit cards are an easy way to start building your credit score and history. It’s also the only way to borrow without paying interest — so long as you pay your dues on time. Even paying small transactions in full and on time can drive you into the super-prime category. That, in turn, will help you when you need a bigger loan, such as a home loan. Borrowers who are new to credit often pay higher interest rates. If you had a history of using a credit card responsibly, you’ll appear more creditworthy and get a lower rate.
Also read: It is easier than ever for Indian households to borrow now. So, why aren't they spending more?
Be frugal
You may have a large spending limit on your credit card, but if you hit it frequently your credit score will suffer. One way to manage large spends is to actively pay down the debt without waiting for the bill to be generated.
Adhil Shetty is the CEO of BankBazaar.com.
