How to manage your credit to avoid loan defaults?

Maria is a young enthusiast entrepreneur. She had never struggled for anything. Born with a silver spoon, she has been very near to the spoiled brat! Never the less, she is amazing at business trends. She started her own firm in digital marketing when she was 19. It’s been 6 years now. And her firm has seen all the awards and recognition.

She is great with business, but one thing she is not good at is handling finances. Remembering repayment dates. Remembering how much to use her credit card. She has missed many payments in past, not with the intention of not paying, but not remembering to pay. She has delayed her loan repayments. Ever since she started earning, she has been handling her finances on her own! Maria now wants to start a whole new venture in big data analysis. So, she is now going to go to banks and apply for a business loan. While applying the loan to different banks, all she faces is a big rejection. She is confused as to why is it happening? She has 3 credit cards that have a credit limit of a minimum of three lakhs. She has taken a personal loan, education loan in past. Nowhere had she been through the rejection. So what’s wrong now? Now, while the loans are getting rejected, she checks her credit score and credit report. Her score is below 650. Which is lower than expected.

What made the score low? She has always paid the EMI of loans she has taken and she has not paid any credit card bill. While having a proper look over her report, she encountered the actual problem. The issue is not that she hasn’t paid, but the issue is of the timeline. There are several missed and late payments. And that’s not just once, but more than 22 times over the period of the last three years. This shows the reckless attitude towards handling credit. When speaking with the bank manager, she came to know that she has entered the loan defaulter’s list. Once an individual enters this defaulter’s list, it is very difficult to get a loan. Or even if the loan is approved, it is approved with very high-interest rates. There are various ways how one can prevent himself/herself from entering this list!

  1. Credit Utilization Understanding the credit utilization ratio is too important. Banks would offer the whole limit, but it is not advisable to use all of it. It is considered healthy to use only 30%-35% of the total credit card limit. If the usage is more, one can apply for one more credit card. But one has to make sure of not exceeding that limit.
  2. Repayments Either the credit card bill or a loan EMI, one should never miss on the due dates. If possible, the payments should be made well in advance. Nothing that early payment would help in maintaining or increasing the credit score but they would help in not missing on dates.
  3. Missing on a payment Single missed payment would not make any of great effect on the score. But several missed or delayed payments would create a huge impact on the score showing irresponsibility.
  4. Credit Mix, New credits A healthy mix of secured and unsecured types of credit is good for the score. Even applying for new credit over a period helps in a better score. But too many new credits are again an issue, so not too open too many credit accounts.
  5. Older Accounts Older credit accounts also have a better effect on the score. Even if the older credit account is not in use or is not been taken care of for a longer period, do not close it. The basic five parameters of how a credit score is calculated should be taken care of and one would never go beyond the 750 scores!

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