Default in Credit Score? No Worries At All.
A Credit score is a three-digit number that reveals your creditworthiness. When you apply for a loan, the first thing lenders will look for is your credit score. It is an essential factor that helps you get loan approvals. It’s important to know your credit score. Major credit bureaus in India- CIBIL, Equifax, Experian, and Highmark, issue credit scores for every individual by evaluating their credit history.
Credit score usually ranges between 300 and 900. The higher your score, the better options you will get. You must maintain a good credit score by on-time payments, paying off your debts, and keeping your credit utilisation ratio below 30%.
A good credit score allows you to get various benefits from the lenders, such as -:
- Quick approval of loans -: With a good credit score, lenders will be confident enough to approve a loan for you quickly. According to lenders, you are a person with responsible credit behaviour who will repay the amount on time.
- Low-interest rates on loans -: When you have a higher score, the possibility of getting a loan with low-interest rates is higher than people with low credit scores.
- No credit risk involved -: there will be no risk for lenders when you have a high credit score because you will be more likely to make your payments on time. Thus lenders might provide various benefits, such as lounge access, cash back, bonus points, etc.
Sometimes, it happens as the borrower will apply for a personal loan or credit card and use it, and for upto six months, they maintain a disciplined repayment mode. Then after optimum utilisation, they apply for a larger amount of loans by taking extra advantage of the loan they already approved. This dishonest behaviour of the borrower can create trouble for the lenders.
When changes occur in your credit repayment behaviour, it affects your credit score too. Credit bureaus will record each financial transaction with the help of lenders. When you miss a payment, you will get a default notice from the lender. And if the default gets recorded in your credit report, it will affect your credit score. A default will remain in your credit file for six years after you pay it back. So in the meantime, you can’t get approval for a new loan. Others may give loans but with high-interest rates. A default in your credit report will mostly result from a missed payment and a pending loan amount. So taking preventive measures is always better.
Tips to improve your default credit score
- Make a habit of regular payments -: It is very important to make your payments on time. Always pay your credit card bills, loan repayments, and EMIs on time. You can set a reminder or an automatic payment option for your dues. It will help you to be financially responsible and eventually have an impact on your credit score.
- Payment of outstanding balance -: If you have any outstanding credit balance on your credit card, pay it off soon. Because if you have more outstanding dues and balance on your credit card, your credit score will decline. Making on-time payments will increase your credit limit along with your credit score.
- Maintain credit utilisation ratio below 30% -: Maintaining your credit utilisation ratio is very significant. If it goes up, it indicates you spend more of your income paying debts, and it will cause a fall in your credit score.
- Always check your credit report -: You should check your credit report to avoid errors and fraud. If not, lenders may get confused, and those errors will impact your credit score. A false report sent to the credit bureau can lower your credit score.
- A balance between credits -: You must ensure a balance between secured and unsecured loans. If one of them has a higher proportion, it will lower your score.
- Never indicate risk -: When you fail to repay credit card bills and make payments below than total amount, these are the first signs of stress in your credit behaviour. If you take advance cash using a credit card and use a card to fulfil business expenses, then these are the early signs of cash flow strain. It will affect our credit behaviour and your credit score.
- Don’t apply for multiple credits -: When you take a new credit, it benefits your credit score. And when you apply for a loan or credit card, there will be a hard inquiry from the lender’s side. So when you opt for multiple credits, it will lead to more hard inquiries. A hard inquiry will stay in your credit report for two years. So in a short period, you have multiple hard inquiries, which will create a fall in your credit score and a rejection of loans in the future.
- Be patient -: You can’t improve your credit score overnight. It needs constant effort like monitoring your credit reports, your credits, your spending pattern, and repayment of dues. Over time, this will help you get a higher credit score and improve your creditworthiness.
After a credit score default, you need proper planning and a disciplined routine to increase it. You must be vigilant enough to make your credit report error-free, as a small error can badly cost your credit score. You must always strive for a good credit report and maintain it to get better chances for quick loans and credits.