Credit Score Tales Of Hits ‘N’ Misses

An article about credit score? What interesting stories can we have on this? In fact, why should anyone even care? It’s not like it’s a measure of something critical, like your blood pressure or net worth. Well, credit scores do impact our daily lives, and we’ve got some answers. In June 2023, during the Credit Score Awareness Week, many people shared their credit score stories with us, some of which have interesting learnings for consumers. Here are a few of those.

Don’t Be Late

How bad can one late credit card payment get? It happens to most people, and it turns out that one missed payment can be very bad.

Syed, a digital marketer, rarely took his credit card out of his wallet. He preferred his debit card. One day, Syed was at the local Crossword. They couldn’t process his debit card, and out came the credit card.

It was a small payment of Rs 250 he made for a book. But when the credit card due date arrived, Syed was abroad. He couldn’t access his bank due to info-security restrictions and missed the due date. He returned to India and immediately paid the bill with penalty and interest. The book now cost him Rs 550. Worse, Syed’s credit score that was 844 before this event, fell to 776 in the first month and then to 727 in the second month. His score had gone from ‘excellent’ to merely ‘good’. A few months of disciplined credit card use and score-tracking later, Syed was over 800 again. It’s been six years since the incident. Syed has never been late on his credit card payment since then.

The Cost Of A Bad Score

Jimit, a trader, was in the market for a home loan. His score was a robust 813. Caught up in the home-buying process, he missed a credit card payment. This, coupled with other factors, pulled his score down to 699. He needed a home loan of Rs 45 lakh for 20 years. With an excellent score, he could have got it for 8.50 per cent. With a sub-prime score, he is now being offered a loan at 10.25 per cent.

The difference in interest: Rs 48.72 lakh versus Rs 61.01 lakh. The projected cost of one missed payment is Rs 12.29 lakh. Once Jimit improves his score, he could refinance to a lower interest rate and erase some of this interest burden. But all of it comes at a cost.

Navneeta’s 894

It’s rare to have a score of 900. But Navneeta has got close. How did she do it? Her impressive score of 894 is fuelled largely by the one loan she’d taken—a home loan that was paid off some years ago. She has zero late payments. She has an add-on credit card. And while her credit card utilisation can be occasionally high, what’s most important is timely and full repayment. Credit utilisation—essentially, the percentage of your spending limit used in a month—moderately impacts your score. But it hasn’t hurt Navneeta because her payments are on time and in full. If she rolled over her dues to the next month, her utilisation would spike, and her score would shrink.

Apply Thoughtfully

Nitika is a teacher and a shopaholic. Someone advised her to shop with credit cards to avail of various offers. The no-cost equated monthly instalments (EMIs), discounts, deals, and cashback with your preferred brands do make fulfilment easier. Nitika applied for four cards at once. Each time you apply for a new credit line, be it a loan, a buy now pay later (BNPL), or a credit card, the lender checks your credit history.

Each such check—which we call a hard check—lowers your score fractionally. Several checks at once lower your score substantially. You appear credit-hungry to lenders. So they reject your application.

You apply again, your score falls again, and you get rejected again. Therefore, apply thoughtfully. Do your loan eligibility research, shortlist your options, and apply for the best option. If you’re rejected, understand why it happened before you apply again. If you failed to understand the reasons for rejection, you’ll make the same mistake again. This would hurt your score more.

Spotting Loan Fraud

Some egregious cases of credit score damage linked to loan fraud emerged in 2022. Many people took to Twitter to report loans fraudulently taken in their names and defaulted on. Their credit scores were damaged for no fault of theirs. The matter escalated through the lender, credit bureaus, and the Reserve Bank of India (RBI). The loans were struck off the victims’ records. Their scores were restored. These victims were alerted to the fraud only because they had checked their credit report regularly and spotted the loans they couldn’t recognise.

Payments Not Reported

I checked my own score in India for the first time in 2017. My score was above 800. But to my shock, I was marked late on five EMIs on a car loan I had taken from a bank.

The bank took my EMI cheques, but didn’t deposit them on time, and wrongly reported me late.

Unknown to me, my credit score must have fallen in those months. But the loan was repaid, and my score improved. The learning: it’s necessary to track your score while servicing any form of debt. The impact of credit use and timely payments is seen month by month. If you see your score falling, understand why, and take corrective action. If you are not at fault, you can report the erroneous reporting to the bank and the credit bureau via their escalation channels.

Loan Never Closed

Stories like mine aren’t rare. Back in 2012, Rupam, a hairstylist, took a two-wheeler loan. By 2015, he had paid off the loan and collected a no-dues certificate from the lender. Fast forward to 2023, Rupam is in the market for a loan to renovate his salon. Now, he gets the shock of a low credit score. His lender had not marked his loan as ‘closed’, and instead marked it late and in default. This had wrecked his credit score and made it impossible for him to get another loan. He found it out only when he checked his credit score.

50% Think Self-Checks Are Bad

I recently asked my followers on LinkedIn if they thought self-checks were bad. Self-checks—also called soft checks—are personal enquiries into your credit history.

A huge chunk of my followers are salaried techies. Out of the 1,600 respondents, 50 per cent believed soft checks are harmful. This is a myth. You can check your score as many times as you want. Credit bureaus give you a free check once a year. Many financial platforms give you unlimited free checks. If you don’t have an active credit line, check at least once a year. It might help you spot any problematic irregularities.

Credit score is an important measure of your financial health. Being aware of it and keeping it above 750 will keep you financially healthy.

By Adhil Shetty, CEO, BankBazaar.com