A credit score is a unique number that assesses your financial health based on how you have used credit in the past. It is a three-digit number between 300 and 900. A high score (750 and above) indicates that you are in good financial health; that you were able to pay your loans and credit card dues in full and on time. With a good score, you have a good chance of getting new loans.
However, a low credit score often makes it harder for you to borrow money from financial institutions. The low score – in most cases caused by late payments – is a sign of risk for new lenders. They may not want to lend you or lend you at a very high interest rate. You can always rebuild your score. Here’s how.
A bad credit score
When your credit score is between 300 and 550, it is classified as a bad score. If you have a credit score in this range, of course you should correct and take steps to improve your credit history step by step. It is not an overnight job. Financial consistency and discipline over several years are necessary to rebuild your score.
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Assess the reason for the low credit score
Knowing the reason for your declining credit score is crucial before you can plan a strategy to improve it. You can get your latest credit report from a credit bureau or aggregator such as BankBazaar who give it to you for free. Analyzing your credit score will help determine why your credit score has fallen below expected levels. Sometimes, one or more reasons can explain a drop in your credit score. In most cases, the score drops quickly due to default or late payment of the loan or credit card. A high credit utilization ratio (CUR), multiple inquiries for an unsecured loan, incorrect information reported by the lender to the credit bureau, loan default by a co-borrower, etc., are a few -one of the reasons that can lead to a drop in your credit score.
Impact of a low credit score on borrowers
A low credit score can reduce your financial flexibility and ruin your borrowing plan. If you have an existing loan, such as a car loan or a home loan, the bank may increase its interest rate due to a decline in credit score over the term of the loan. A low credit score can make it difficult to get a loan or a credit card.
Can you borrow with a low credit score?
You may find it difficult to get an unsecured loan from banks if your credit rating is low. Even if you can get a loan, the bank may charge a higher interest rate. You can explore lending options from NBFCs as they are more lenient on credit scores than banks. But the compromise would be a higher interest.
You can opt for a secured loan from the banks if your credit score is not up to scratch. Popular secured loans such as a loan against titles, a loan against FD or a loan against property can be used by those with poor credit ratings or no credit history. You can get a secured loan for a longer term and at an attractive interest rate. Repaying the secured loan on time can also help you gradually improve your credit score.
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Tips for Fixing a Bad Credit Rating
If you are looking for a permanent solution to a low credit crisis, you need to work hard to bring it back to normal. You can’t improve your credit score overnight, and it’s a gradual process. You must follow strict financial discipline to improve your credit score. You must repay your existing loan EMIs on time. Keep the cumulative CUR on your credit cards below the 30% level. Avoid needlessly asking for too many loans, which leads to difficult requests that hurt your score.
If your credit score has dropped due to inaccurate reports from your lender to the credit bureau, ask your lender to immediately update the credit bureau with the correct information. If you need a new loan, opt for a secured loan over an unsecured loan until your credit score is back to normal.
A low credit score reflects the deterioration of your financial health. However, this does not mean that you are financially helpless. By changing your financial habits and monitoring your debt management, your credit score can reach higher levels. With a good score comes greater financial freedom.
(The author is CEO, Bankbazaar.com)