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Bad Credit Score

If you had your loan or credit card application rejected with the reason being bad credit score, you know what this is. A credit score is a cumulative number of how you have performed financially managing and paying back any credit like loans or credit card that is utilized. If an individual has never taken a loan or credit card they will not have a credit score and fall under the category new to credit. If a person has taken loan or credit card and pays their EMI or credit card bills regularly then that person will fall under the category credit healthy as their credit score will be very good. On the other hand, if a person after taking a loan has missed multiple EMI or in a position of not able to pay their dues their credit scores will get affected negatively which will push them to fall under the category bad credit.

Bad Credit Score

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.

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. So, if your score has not increased in a month just wait for at least 15 more days before getting your credit report to check your score.

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