Anisha wanted to purchase her dream house and was delighted at having her home loan application approved. A few years later when she decided to get her first car, she put in an application for a car loan. Much to her dismay, the loan was declined this time, and Anisha checked her credit report for possible answers. She realised that her credit score had taken a dive because she had defaulted on some of her home loan EMI repayments. This put Anisha’s dream on hold – a situation that could well have been avoided, had she been regular with her home loan EMIs.
Falling behind on payments can be one of the worst things you can do for your credit score. When you avail of a credit card or loan, ensure the strictest financial discipline in terms of loan repayment. Given the importance of the credit score in an individual’s financial life, it cannot be ignored or taken lightly.
What factors determine the credit score?
Below are the factors that impact your credit score. You will notice that of these, your payment history is the largest chunk. In a nutshell, even a single delayed or missed payment can bring your credit score down drastically. Thus, when you apply for a personal loan for low CIBIL score, for instance, chances that your application gets rejected are rather high.
Now that we have discussed the various factors that a credit bureau considers when determining the score, let’s move on to your further course of action.
Know where you currently stand
First things first – get a free credit score from one of India’s credit bureaus. There are currently four of them. This report will indicate the factors that determine your score, and what exactly is impacting your score. In fact, it’s a good idea to monitor your score on a regular basis – experts recommend that checking on this important aspect once a year may not be a bad idea at all.
Once you are armed with this information, you can look at ways and means of bettering your score.
How do late or missed payments affect the credit score?
Failed home loan payments have a negative impact on the credit score – just how severe the impact is, will be determined by a number of factors.
Firstly, a lot depends on how late your payment is. Let’s say your payment was due on June 30, but you wind up paying on July 1. In all likelihood the lender will overlook this day’s lapse and the failed payment will not be reported to the credit bureaus. Thus, your credit score may not get hit. However, a payment that is say for instance 30 days past the due date will not go unnoticed, be it towards a home loan or any other loan EMI or a credit card outstanding. Remember the other downside is financial loss: you wind up shelling out a fair amount by way of late payment fees and related charges and taxes.
A couple of missed payments may impact your credit score in the short term, say for a few months. However, the impact of consistently missing or delaying payments on your credit score can be a long one, sometimes lasting even a few years. This means that each time you apply for credit subsequently, your low score will come under the scanner. When your score is low, it’s not easy to get further loans such as a personal loan for low CIBIL score or credit cards at competitive rates of interest. It’s entirely possible that a lender will decline the loan altogether.
How to rectify the damage caused by late or missed payments
For the time being, while the damage is done, you can ensure that it is not long-lasting. Begin by correcting your errors: make sure all payments are up to date. The sooner you get on track, the sooner you can start rebuilding your score.
It’s also a good idea to avail of an ECS mandate or auto debit facility from your bank account in order to ensure that your loan repayment is taken care of on the due date itself. This will mean no more delayed or missed payments, which will help boost your credit score, given time.
A copy of your free credit score can help you understand where to start off with rebuilding your score. Fix your credit report by paying bills and EMIs on time, and in full. Ensure you have a healthy mix of both unsecured and secured loan products in your portfolio. Keep credit utilisation low so that you don’t appear to be relying on credit to make ends meet.