A credit score is a unique number that rates your financial fitness basis how you have used credit in the past. It is a three-digit number that ranges between 300 and 900. A high score (750 and above) shows you are financially fit; that you’ve been 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 to new lenders. They may not want to lend to you or lend to you at a very high interest rate. You can always rebuild your score. Here’s how.
A Poor Credit Score
When your credit score falls in the range of 300-550, it is categorised as a poor score. If you have a credit score within this range, you must course 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 needed to rebuild your score.
Assess The Reason For Low Credit Score
Knowing the reason for the fall in your credit score is crucial before we can plan a strategy to improve the same. You can get your latest credit report from a credit bureau or an aggregator such as BankBazaar that gives it to you for free. Analysing your credit score will help determine why your credit score has fallen below expected levels. Sometimes there could be one or more reasons for a fall in your credit score. In most cases, the score falls quickly due to a default or delay in loan or credit card payment. A high credit utilisation ratio (CUR), multiple hard enquiries for an unsecured loan, incorrect information reported by the lender to the credit bureau, default in loan repayment by a co-borrower, etc., are some of the reasons that can cause a drop in your credit score.
Impact of Low Credit Score On Borrowers
A low credit score can squeeze your financial flexibility and spoil your borrowing plan. If you have an existing loan, such as a car or a home loan, the bank may increase its interest rate due to a drop in a credit score during the loan period. A low credit score can make getting a loan or credit card difficult.
Can You Borrow With A Low Credit Score?
You may find it difficult to get an unsecured loan from the banks if your credit score is low. Even if you can get a loan, the bank may charge a higher interest rate. You can explore loan options from the NBFCs as they are more lenient towards credit scores than banks. But the trade-off would be higher interest.
You can go for a secured loan from banks if your credit score is not up to the mark. Popular secured loans such as a loan against securities, a loan against FD, or a loan against property can be availed by those with poor scores or no credit history. You can get a secured loan for a longer tenure and at an attractive interest rate. Repaying the secured loan on time can also help you improve your credit score gradually.
Also Read: 5 things you must know before applying for a gold loan
Tips To Fix A Poor Credit Score
If you are looking for a permanent solution to a low credit score crisis, you must seriously work on getting it back to a normal level. You can’t improve your credit score in a day, and it’s a gradual process. You need to 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 unnecessarily applying for too many loans which lead to hard enquiries that hurt your score.
If your credit score has gone down because of inaccurate reporting by your lender to the credit bureau, then ask your lender to update the credit bureau with the right information immediately. If you require a new loan, go for a secured loan over an unsecured one until your credit score is reinstated to a normal level.
A low credit score reflects your deteriorating financial health. Nevertheless, it doesn’t mean you are financially helpless. By changing your financial habits and keeping a watch on your debt management, your credit score can inch towards higher levels. With a good score comes greater financial freedom.
(The author is CEO, Bankbazaar.com)