A credit score is a number between 300 to 900 that shows your creditworthiness. A higher score indicates that you have used credit properly in the past and your chances of getting loans are high. A low credit score however generates hassles such as rejection of loans and credit card applications by the lender. But, you can always improve your credit score by taking the necessary steps. Let us look more elaborately at how a poor credit score impacts borrowers and what they can do about it.
What is The Impact of A Low Credit Score on Borrowers?
A low credit score will make it difficult for you to obtain loans and credit cards. Even if you manage to get loans, the interest rate will be very high and with respect to credit cards, the credit limit may be low. Interest rates on existing loans may also be increased during the loan period due to a drop in the credit score.
Can You Borrow A Loan With A Low Credit Score?
It is possible to get a loan with a low credit score, but it is however difficult to get an unsecured loan. Banks mostly give unsecured loans to individuals with good credit scores only. Probably, you can then try with NBFCs for unsecured loans as they are lenient towards credit scores. But, then the interest rates will be very high. So, you can go in for secured loans. Loan against property, loan against FD, loan against securities, or loan against gold are all secured loans. Making timely repayments for your secured loan will also help you improve your credit score.
How To Fix Your Credit Score?
When your credit score ranges between 300-550, it is considered as a poor score. In this case, you must take steps to improve your credit history step by step. Upgrading your credit score does not happen overnight. It is going to take time. Financial consistency over several years is required to rebuild your score.
Here are some tips on how you can avoid a negative impact on your credit score and how to improve a poor credit score
Tip 1: Check your credit report and assess the reason for a low credit score
By checking your credit report regularly, you can find out what is pulling down your credit score and where it is getting affected. Defaults in credit card or loan payment, a high credit utilization ratio, default in loan repayment by co-borrowers, or erroneous information reported by the lender to the credit bureau are all reasons for the cause of a dip in your credit score. This way, you can correct the mistakes done. Ultimately, it leads to easy approval of personal loans.
Tip 2: Make timely EMI and credit card bill payments
Don’t miss out on EMIs or credit card bill payments. Defaulted payments will lower your credit score drastically.
Tip 3: Consolidate all your loans into a single loan
If you have several loans from many banks, bring them together into one. This will help you manage your EMI payments easily. If you have too many loans, you will default on your payments, and this will lower your credit score. Also, don’t just pay the minimum amount due but clear the complete outstanding debt. This will help you in boosting your credit score.
Tip 4: Keep your credit utilization within 30%
The credit utilization ratio should be kept below 30%. The credit utilization ratio indicates your dependency on credit money. It is the ratio of how much credit you are using to how much credit is available to you. If you are using multiple credit cards, keep a check on how much money you are using on credit.
Tip 5: Keep old accounts on your report
Some people remove old accounts that are settled from their credit report. This is not a good idea because old accounts may have a good repayment history. They will improve your credit score. Also, if the debts have been paid, you should keep them on your report as they boost your credit score.
Tips 6: Do not get too many loans or credit cards
Some people apply for and obtain multiple credit cards just to increase their credit limit.
When you apply for too many credit cards, you will be unable to pay the multiple credit card bills on time. This will result in your credit score dipping drastically. Similarly having too many loans will leave you having a tough time in paying several EMIs. So, plan your credit wisely and decide how many EMIs or credit card bills you can manage to pay.
Tip 7: Limit the number of hard inquiries
There are two kinds of inquiries. When you check your own credit or when a potential employer checks your credit or when the financial institution with which you do business checks your credit, it is called a soft inquiry. Soft inquiries do not impact your credit score.
Hard inquiries are those made by financial institutions like banks or NBFcs when you apply for a loan or credit card. Hard inquiries when done frequently will affect your credit score negatively. Lenders will think that you have some financial problem when there are too many hard inquiries.
Tip 8: Do not apply for loans even after being rejected
Don't make the mistake of applying for a loan even after your loan application is rejected. When a loan application is denied, it will get recorded in your credit report. So, when you apply for a loan again, lenders will see this information and your low score and reject your application again.
Conclusion
A low credit score indicates poor financial health and indiscipline. But it does not mean that it is the end of the world. By practicing financial consistency and keeping a watch on your debt management, you can boost your credit score. With a good score, financial stability and freedom set in.
