Missed payments are reflected in the 'Days Past Due' and 'Amount Overdue' fields in the ‘Accounts’ section of your credit report.
If you’ve ever bought something on loan or have a credit card in your wallet, you are likely to have a credit report and also a credit score derived from the credit report. Your credit score is a reflection of the consistency with which you have met your debt obligations over time. Your credit score and report are used by lenders to decide whether they will approve your credit application. This number - ranging from 300 to 900 – is taking on an increasingly significant role in its ability to help you and your family build a better life.
Having a good credit score of 780+ (Experian Credit Score) or 750+ (CIBIL Credit Score) can help you secure faster loan approvals for things you need such as appliances, medical expenses, education fees, a car or a home. Recently, some lenders have even pledged to provide lower interest rates on home loans to consumers with a high credit score.
Missed payments and a pending amount on your loan or credit card can bring your score down, and result in unpleasant surprises in the form of a loan application rejection. This can be particularly painful when applying for emergency funding (such as medical expenses) or when a down payment has been made on your dream home and you are unable to secure the funding you need to complete the purchase.
Missed payments are reflected in the “Days Past Due” and “Amount Overdue” fields in the ‘Accounts’ section of your credit report. This is one of the primary reasons that a lender will reject your loan application. Why? Because being late on payments is an indication of financial stress and that you may not be able to take on additional debt obligations.
Typically, missed payments happen in two scenarios:
When old credit cards accounts haven’t been closed: Many consumers in the early 2000s ended up signing up for credit cards that were free in the first year, didn’t use them much and then forgot about them. In our highly mobile world, we tend to change jobs and houses – sometimes internationally - and informing our credit card provider is not always highest on our list of priorities. Hence, in the second year, the credit card company doesn’t know you have moved and bills your annual fees to an address that you do not live at anymore. This leads to nonpayment of dues and an annual fee that can balloon into a huge liability. This gets reported to the credit bureau and then you have an unpleasant surprise when applying for credit.
If you’re in financial trouble: Very few people are fortunate enough to go through life without any financial ups and downs. This could happen because of excessive credit card debt that rises out of control very quickly, or if you lose your job and you find yourself unable to pay on time.
So what can you do to fix these situations?
The first thing you should do is check your credit score and report, and identify the problematic accounts.
In the event that there are old credit card dues that are already overdue, it is vital that they are paid in full. If you negotiate a part-payment the lender is likely to record this as “written off” or “settled” and this may result in loan rejections. It might make sense to convert the credit card dues into a longer term personal loan at a lower interest so that the monthly outflow is manageable. Interest rates on credit cards can range from 36% to 48% per annum, while personal loan rates range from 14% to 18%.
If you’ve lost your job and are unable to meet your obligations using savings, then it’s a good idea to wait until you have a job and are able to pay what you owe.
Overall, prevention is always better than finding a cure, and following these steps should help you avoid a debt trap:
1. The first rule is to always borrow within the limits of what you earn. We recommend that your monthly outflow doesn’t exceed 50% of your income.
2. Ensure that you have one year of living expenses and EMI outflows saved in order to help tide you over in times of financial difficulty.
3. Sign up for an online free credit score and report service which provides you with a monthly update and remind you to check in to help you stay on top of your finances.
4. Make sure your credit score is higher that 780 (Experian Credit Score) or 750 (CIBIL Credit Score) if you want to increase your chances of being accepted for credit.The writer is Country Manager – India of ClearScore