BAD CREDIT SCORE

If your loan or credit card application has been rejected due to a low credit score, it is important to understand what a credit score means. A credit score is a cumulative number that reflects how well you have managed and repaid your credit, such as loans or credit cards. It helps lenders evaluate your creditworthiness before approving new credit. If you want to know your current score, you can Get Free Credit Score from Credit Mantri and understand your credit profile better.

If an individual has never taken a loan or credit card, they will not have a credit score and will fall under the category “New to Credit.” If a person has taken a loan or credit card and pays their EMIs or credit card bills on time, they will be considered “Credit Healthy,” which usually results in a strong credit score. On the other hand, if someone misses multiple EMIs or fails to pay their dues after taking a loan, their credit score may drop significantly and they may fall into the “Bad Credit” category.

Importance of credit score

A credit score is important because it is the first thing that lenders (Banks/NBFCs) check to see if a person is eligible for any loan or credit card. There are 2 ways that credit scores are checked

1. Soft pull or soft check: In this case the bank or NBFC obtains an individual’s credit score from other means. For example, if a person checks the eligibility for a loan or credit card the bank will simply check the credit score alone in which case the score will not get affected in anyway.

2. Hard pull or hard check: Here the individual applies for a loan or credit card in which case the bank or NBFC has been given explicit rights to pull the applicant’s credit score and report which will affect the person’s credit score.

It is based on this score from the report that banks get to know how organized you are with repayment of credit. With high credit score you can get great terms on the loan while with bad credit score the person will get high interest rate, lower tenure, lower loan amount or if the credit score is low enough the application will be rejected.

Factors that affect credit score

There are multiple factors that affect a person’s credit score. They are

• Payment history – The most important factor. How regular you are on your loan payments
• Amounts owed – Having very high debts or maxing out credit cards with dues continuing for many months will have a negative impact on your score
• Length of credit history – The longer the credit history, the higher the credit score
• Credit mix – With different types of loans available CIBIL™, Equifax etc. needs a debt to determine your score
• New credit – Taking out credits within short time increases your credit risk

It is based on these that your credit score is calculated by the 4 credit bureaus operating in India – CIBIL™, Equifax, Experian, Highmark. A person’s credit score will vary from bureau to bureau as each uses their own proprietary algorithm to calculate the credit score.

Best and lowest credit score to have

The eligible credit score varies from bank to bank where some will approve loans or credit cards for individuals with score of 650 while others will only approve credit card for individuals with credit score of 700 and above. Check your credit score now

While the lowest credit score a person can have is 300, it is best to have a credit score of 750 which is considered by most banks an excellent credit score.

How to improve credit score?

One cannot improve their credit score overnight, but they can improve the score in 30 days. Having bad credit is not the end. One can improve their score with the following methods.

1. Paying of your old debt

In case you have a “settled” account – where you have only paid partial amount of your debt or “written off” account – you did not pay your debt at all and the bank has considered it as a bad debt and conveyed the same to the credit bureau, you need to settle those accounts. If you do this, it will boost your credit score.

2. Take short term loans

By taking short term loans and repaying it regularly your credit score will improve. In these type of loans, the interest rate might be high, but it is one of the fastest way to improve your credit score. This method is useful for people who are looking to make a quick jump like from a score of 700 to 800 to avail better and bigger loan. Being an unsecured loan, it is very difficult for people below the score of 650 getting it.

3. Secured credit

Using secured loans like loan against property or secured credit cards where the risk associated for the bank is very less as the borrower provides collateral to bank for the loan. If you have a very poor credit score less than 600 this is a very good option as you getting any unsecured credit is highly unlikely. With this method you need to pay the credit card bill or EMI on time to improve your credit score.

4. Alternate credit

Apart from the traditional lenders there are the new age online Peer-2-Peer lenders who provide loans or line of credit to customers. They provide short term loans based on salary. They do provide credit to people with bad credit score, which will have a bit higher interest rate.

When following any of these methods to improve your credit score, you need to remember 1 thing that, for the score changes to reflect will take some time as the lender will take time to update the credit bureau. If your credit score has not increased within a month, it is advisable to wait at least 15 more days before you check your credit score report again.