Your credit score is a significant number in your life. It affects your life in many ways. A lot depends on your credit score. A lot depends on your credit score. Banks and NBFCs (Non-Banking Financial Companies) judge your repaying capacity by referring to your credit score. Whether you get a loan or not, depends on your credit score. Today, the credit score has become crucial because banks offer interest rate concessions to borrowers having credit scores more than 750. You get Personal Loans and Credit Cards easily with such an excellent rating. Hence, maintaining the credit score is vital.
Factors that affect your credit score
- Default in repayments of loans (intentional or unintentional)
- Missed EMIs (Equated Monthly Instalments)
- Applying for loans frequently
- Standing as guarantor for a defaulter
There are other external factors, but the primary factor responsible for reducing your credit score is “default or delay in the repayment of your loan instalments.”
Not many people are aware of how the credit bureaus function. They do not know much about the credit scores and the factors that affect it. Some collection agencies harass borrowers by threatening to damage the credit reputation of the borrowers even if there is an instance of a cheque bounce or a failed Electronic Clearance Service (ECS) attempt. Now, the question is, ‘whether a failed ECS or a cheque bounce affects your credit score’? The answer is an emphatic NO. You usually give an ECS mandate to your bank when you submit your Online Personal Loan Application. It is to secure the repayment of the instalments.
Naturally, you will wonder whether a failed ECs attempt constitutes a default. Yes, it is a default, but you have time to make the payment before the banks report the default to the credit bureaus.
When do banks report the default of the loan instalments to the credit bureau?
The banks do not report defaults to credit bureaus on a real-time basis. They wait for 29 days before reporting the default to the credit bureaus. Hence, you have 29 days within which to set things right. If you miss an ECS attempt, you can always approach the bank with an alternate mode of payment like cheque or cash. The bank will charge you a late payment fee, but will not report the default to the credit bureaus unless the default is for more than 29 days.
However, if you do not pay the particular missed EMI within 29 days, the report goes to the credit bureaus. Under such circumstances, it can affect your score. The best course of action is to clear the default as soon as possible and continue with your regular repayments in due course. This action can help repair the damage and set your credit score back on track.
Similarly, if you stop the payment of am EMI cheque, the banks do not report it to the credit bureaus. The banks report default in the instalments alone. Hence, if you pay the instalments within the grace period of 29 days, the report of delayed payment does not go to the credit bureaus.
Unscrupulous collection agencies take advantage of the customer’s ignorance and try to harass them by threatening to report the matter to the credit bureaus. Hence, customers should be aware of the factors that do not affect their credit score. Let us list out five such factors for your benefit:
- Failed ECS/Cheque Bounce: Banks do not report the default in the repayment unless it remains outstanding for more than 29 days. Hence, you have ample opportunities to set things right.
- Inoperative savings account: Banks levy charges on customers for not maintaining the minimum balance in their savings account. The costs can cause your savings account to go into the overdrawn mode. Nevertheless, banks do not report this fact to the credit bureaus because there you have not availed any credit facility with the bank. The reporting to the credit bureaus is in respect of loan accounts alone.
- Utility bills: If you miss your electricity bill payment, the electricity board can discontinue your electricity supply, but cannot report the matter to the credit bureaus. Hence, the default of a utility bill payment will not affect your credit score.
- Soft checks: You can check your credit score any time. They refer to it as a ‘soft check.’ Such soft checks do not affect your credit score.
- Spouse’s default: If your spouse has defaulted in the repayment of the loan, it will not affect your credit score unless you are a co-borrower or a guarantor to the facility. If you do not have any connection with the loan taken by your spouse, any default in the loan account will not affect your credit score.
We reiterate that “a failed ECS attempt does not affect your credit score as long as you set things right within 29 days of the default of payment.”
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