Having several credit cards for different perks may seem fun and utilitarian, but you end up with high-interest debt that can damage your credit score, Satish Mehta, Founder, Athena CredXpert tells ET Wealth.
What are the common reasons for a poor credit score?
The credit score reflects your ability to repay a loan. There are various reasons for a low credit score. You could be delinquent because you are not paying an existing loan on time, or there may have been too many unsecured loans that were partly paid or settled. Too many loan inquiries in your name will also hurt your credit score. If your credit mix is not right, and you have more unsecured loans than secured loans, the credit score will dip. Besides, if you tend to exhaust your credit card limit very often, your credit score will fall.
Are credit scores accurate? Can credit bureaus make calculation errors?
Credit scores are mostly accurate, but discrepancies can occur in some cases. Apart from mistakes in personal details, the deduplication process by the bureaus can sometimes be wrong. For instance, I can get in my report the account of another person who has the same name as mine, and it can unnecessarily inflate or deflate my credit score.
Can an individual have different scores from different bureaus?
We studied the credit reports of 1,000 individuals from two different bureaus. There were significant differences in some cases. We had a client who had a credit score of 730, but when he went to a lender, they pulled a report from a different bureau and the score was 600. This difference can make or break a person’s decision to borrow. There are many such anomalies that need to be rectified.
What is your advice to people stuck in a debt trap?
Every situation is different, so the solution also has to be customised to the circumstances of the individual. In general, we always advise such people to press the brakes and go into reverse gear. As a first step, they should stop borrowing more money. Next, they should first try to repay the loans with higher interest rates. Third, they should avoid using credit cards.
Are you suggesting that credit cards are responsible for people falling into debt traps?
A credit card is the most expensive piece of plastic in the world. You are charged 40% interest if you don’t pay on time. You would think it’s fine to pay 5% minimum due balance, but they still charge an interest on the outstanding amount. One should avoid treating credit cards like money in pocket. It may seem fun and utilitarian to have multiple cards for different perks, such as lounge access or lucrative discounts, but you only end up with high-interest debt that can damage your credit score and create problems when you need a loan for genuine reasons.
Multiple credit cards increase the availability of credit for an individual. Doesn’t this improve the credit score?
It’s fine to have 2-3 credit cards. The problem begins when people start using 5-6 cards. They may not be exhausting the card’s entire limit, but their ratio of unsecured loans changes. If you have too many unsecured loans, it can impact your credit score negatively.
The ‘buy now, pay later’ option has become very popular with young consumers. What are your observations?
The ‘buy now, pay later’ option is a disease that has hit the industry. You are mortgaging your future cash flow, but your future cash flow will be needed to meet your existing expenses at that time. You will have kids to look after, rent and electricity bills to pay.
How long does it take to improve a bad credit score?
It depends on the severity of the case. The impact of some bad practices, such as a loan that has been written off or settled, stays for a longer period. The more recent the bad debt, the worse it is for you. However, in general, it can take up to six months to get to a reasonably acceptable score.
Some businesses help individuals in debt consolidation. Does that help?
Debt consolidation is a positive attempt at trying to reduce the interest cost by bringing all loans under one umbrella. It’s a good option for the customer, who benefits because his EMIs get consolidated and rates come down and, administratively, he has to worry only about one loan. These businesses charge a fee from the lender under whom the debt has been consolidated. So there can be a conflict of interest. Customers must look at the fine print in terms of costs and other charges before opting for such an arrangement.
The RBI has come down heavily on lenders who use strong-arm tactics for debt collection. What are your thoughts?
Some lenders used to adopt the hockey stick approach for recovering money through extreme means. However, the RBI has become very vigilant about consumer protection and fairness. It has framed guidelines for the debt collection process, which was much needed. For instance, debt collectors can visit a borrower’s home only during certain hours of the day, and it’s mandatory to have a woman in the collection team.
Note:“The ‘buy now, pay later’ option is like a disease. You’re mortgaging your future cash flow, which will be needed to meet your existing expenses at that time.”
The Author is Satish Mehta Founder, Athena CredXpert
What are the common reasons for a poor credit score?
The credit score reflects your ability to repay a loan. There are various reasons for a low credit score. You could be delinquent because you are not paying an existing loan on time, or there may have been too many unsecured loans that were partly paid or settled. Too many loan inquiries in your name will also hurt your credit score. If your credit mix is not right, and you have more unsecured loans than secured loans, the credit score will dip. Besides, if you tend to exhaust your credit card limit very often, your credit score will fall.
Are credit scores accurate? Can credit bureaus make calculation errors?
Credit scores are mostly accurate, but discrepancies can occur in some cases. Apart from mistakes in personal details, the deduplication process by the bureaus can sometimes be wrong. For instance, I can get in my report the account of another person who has the same name as mine, and it can unnecessarily inflate or deflate my credit score.
Can an individual have different scores from different bureaus?
We studied the credit reports of 1,000 individuals from two different bureaus. There were significant differences in some cases. We had a client who had a credit score of 730, but when he went to a lender, they pulled a report from a different bureau and the score was 600. This difference can make or break a person’s decision to borrow. There are many such anomalies that need to be rectified.
What is your advice to people stuck in a debt trap?
Every situation is different, so the solution also has to be customised to the circumstances of the individual. In general, we always advise such people to press the brakes and go into reverse gear. As a first step, they should stop borrowing more money. Next, they should first try to repay the loans with higher interest rates. Third, they should avoid using credit cards.
Are you suggesting that credit cards are responsible for people falling into debt traps?
A credit card is the most expensive piece of plastic in the world. You are charged 40% interest if you don’t pay on time. You would think it’s fine to pay 5% minimum due balance, but they still charge an interest on the outstanding amount. One should avoid treating credit cards like money in pocket. It may seem fun and utilitarian to have multiple cards for different perks, such as lounge access or lucrative discounts, but you only end up with high-interest debt that can damage your credit score and create problems when you need a loan for genuine reasons.
Multiple credit cards increase the availability of credit for an individual. Doesn’t this improve the credit score?
It’s fine to have 2-3 credit cards. The problem begins when people start using 5-6 cards. They may not be exhausting the card’s entire limit, but their ratio of unsecured loans changes. If you have too many unsecured loans, it can impact your credit score negatively.
The ‘buy now, pay later’ option has become very popular with young consumers. What are your observations?
The ‘buy now, pay later’ option is a disease that has hit the industry. You are mortgaging your future cash flow, but your future cash flow will be needed to meet your existing expenses at that time. You will have kids to look after, rent and electricity bills to pay.
How long does it take to improve a bad credit score?
It depends on the severity of the case. The impact of some bad practices, such as a loan that has been written off or settled, stays for a longer period. The more recent the bad debt, the worse it is for you. However, in general, it can take up to six months to get to a reasonably acceptable score.
Some businesses help individuals in debt consolidation. Does that help?
Debt consolidation is a positive attempt at trying to reduce the interest cost by bringing all loans under one umbrella. It’s a good option for the customer, who benefits because his EMIs get consolidated and rates come down and, administratively, he has to worry only about one loan. These businesses charge a fee from the lender under whom the debt has been consolidated. So there can be a conflict of interest. Customers must look at the fine print in terms of costs and other charges before opting for such an arrangement.
The RBI has come down heavily on lenders who use strong-arm tactics for debt collection. What are your thoughts?
Some lenders used to adopt the hockey stick approach for recovering money through extreme means. However, the RBI has become very vigilant about consumer protection and fairness. It has framed guidelines for the debt collection process, which was much needed. For instance, debt collectors can visit a borrower’s home only during certain hours of the day, and it’s mandatory to have a woman in the collection team.
Note:“The ‘buy now, pay later’ option is like a disease. You’re mortgaging your future cash flow, which will be needed to meet your existing expenses at that time.”
The Author is Satish Mehta Founder, Athena CredXpert
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