Credit score has taken an important place in the financial world off late. To be able to avail any kind of credit, a good credit score above 750 is essential. The requirement for credit could arise at any moment and a low credit score might have grave consequences of a loan rejection.
In essence, a low credit score can affect your life in more than one way as given below:
- Rejection of Credit: Rejection of credit can come as a huge blow to someone in dire necessity of credit, like in medical emergencies or any such situation. It can topple the delicate balance of finances that you already need support for with credit.
- Approval of Credit with Unfavorable Terms: While credit is altogether rejected for some individuals who have very bad score, on the other hand, if you have scores in the range of 600-700, you may be approved for a loan, provided you have good repayment capability. However, the loan which is approved may be at a higher rate of interest or at a higher amount of down payment.
- May Disturb your Mental Peace and Well-being: Unavailability of credit when you need it the most can have far-reaching consequences on your mental well-being and individuals may end up borrowing the same amounts at higher rate of interest from the unorganized sector.
However, the good thing about a bad credit score is that it can be improved; all it needs is some sustained efforts to bring your score.
CreditMantri, as your credit coach, would like to bring to you some simple tips through which you can build your creditworthiness after a low credit score.
Analyze Your Reason For A Low Credit Score
Before you can set out to chart a course to examine the scenario of a low credit score, it is very important for you to understand why you have a low credit score. A good step here will be to first get your credit report, which can provide you with an analysis of all the factors of a credit score and which factor is bringing your score down.
Once you are aware of the factors pulling your score down, it is easier for you to take appropriate actions for improving your creditworthiness.
Never Miss Out On A Repayment
While you can focus on improving a particular factor of the credit score, you would also need to pay attention to other aspects which can help you in improving your credit score.
Timely repayment of EMIs or repayment of outstanding credit card bills is one of the cornerstones of a good credit score. Therefore, if you are looking to improve your credit score, it is better that you do not miss out even on a single repayment.
Resolve Your Negative Accounts
Your credit accounts go negative when you stop paying the installments and are being considered as a Bad Debt after a certain period of time. A negative account is something which cannot be afforded when you are looking at improving your credit score.
Hence, we suggest you resolve your negative accounts at the earliest. If you are not sure how to do it, you can get our Expert Help to do so.
Keep Your Credit Utilisation Well Within The Prescribed Limit
Credit Utilisation limit is the ratio of your credit card utilization in relation to your credit limit. Excessive usage of your credit card or maxing it out is akin to being credit hungry. Though the maximum limit for your card is set on a higher side, it is not prudent to spend the entire amount during each billing cycle.
During every cycle, it is advisable to keep your credit limit below 30%. If you are spending excessive amounts on your credit card, that might be the reason for your low credit score. While it is easy to spend on your credit card, if it goes beyond your budget, it might be turn into a credit card debt spiral. After all, credit card debt is the most expensive debt to own.
In addition to increasing your credit utilization ratio, your credit card spending may also be the cause of a certain amount of negative accounts on your credit report, if you are unable to pay them on time.
Pay Attention Before Closing Your Old Credit Card Accounts
Credit History is another important component of your credit score. Lenders prefer lending to individuals who are well-versed and act responsibly towards credit over longer periods of time. In other words, lenders prefer seasoned borrowers. Your older credit accounts which are still in good standing can serve as the anchor for your credit score.
If you are thinking of closing some of the older accounts which are not being used by you, it might be wiser if you don’t close them, unless you have very strong reasons to do so.
Aim To Have A Healthy Credit Mix
- Credit comes in two forms: secured and unsecured credit. While secured credit requires an asset to be pledged or secured against your loan, unsecured credit is free from any such necessities. Examples of secured credit are home loans or vehicle loans, while personal loans and credit cards represent unsecured borrowings.
A good mix of credit is a good indicator of a sound borrower. It demonstrates that credit is not merely used for spending but is also used for building assets like a home or a vehicle. Therefore, if your credit score is not up to the mark, you may want to analyze the kind of borrowings that you have. If you have too many personal loans or credit cards, you should take time and close your personal loans.
It might be even good if you can prepay some of the loans as you would also end up saving some amount towards the interest as personal loans are priced higher than other secured lending.
Limit Your Applications To Credit
Each application for credit ends up as a hard inquiry. Increased number of hard inquiries lead to a low credit score. Hence, if you are looking at improving your credit score, it might be good not to apply for any credit in the interim period.
Once your credit score shows sufficient improvement it might be the right time to consider applying for loans. If you apply earlier, you may also end risking further decline in the score, due to rejections on back of a bad credit score.
Improvement in credit score cannot be brought about overnight. It is a long-drawn process and requires consistent efforts to see improvements, depending on where you stand at the moment. Do not be disheartened; just keep following the tips given above. We are sure you will see an improvement soon enough.