The importance of having a decent credit score cannot be overstated. The need for a loan can arise at any time and being unable to get it on account of a low credit score can be quite problematic.
In most cases, a good credit score (750 or above) is mandatory. Falling below that by a considerable margin could cause you a lot of problems, such as these:
Affect your well-being
Not having access to credit when you need it most can affect your mental well-being and might force you to turn to the unorganized sector, at a much higher rate of interest to boot.
In situations that call for an urgent need of credit, such as medical emergencies, having a loan request rejection can pose a big problem. It can add to the burden of finances that you already need support for with credit.
Unfavorable terms if loan approved
If your credit score is in the range of 600-700 and say you’re approved for a loan on account of good repayment capability, it will come at higher bank loan interest rates or at a higher amount of down payment, neither of which are preferrable options.
But it’s not all doom and gloom if you happen to have dropped your credit score too low, here’s what will be needed to be done for your part to improve credit score:
Find out the reason for the low score
A good first step would be to obtain your credit report, which can give you a clue about which factor is bringing your score down. Once you are aware of the factors pulling your score down, it is easier for you to take appropriate actions for improving your creditworthiness.
Paying of EMIs or outstanding credit card bills on time is how you can lay the foundation for a good credit score. Start by pausing all your non-essential expenses and putting them towards your repayment of existing debts.0
Look before cancelling old credit cards
Another key factor behind your credit score is your credit history. If your credit history shows you act responsibly towards credit over long stretches of time, your older credit cards still in healthy standing can help your credit score. Therefore, it’s advisable to not close your older accounts which are not being used by you.
Have a good mix of secured and unsecured credit
There are two types of credit - secured and unsecured credit. Secured credit requires an asset to be pledged or secured against your loan, while unsecured credit is free from such requirements. Home loans or vehicle loans are examples of secured credit, while personal loans and credit cards are examples of unsecured credit.
If you have a healthy mix of these two types of credit, it’s a good indicator of a responsible borrower as it shows that the credit is not being used only for spending but also for building assets.
Limit your credit application
Each credit application you make results in a hard inquiry. Consequently, more of these hard inquiries eventually lead to a low credit score. So, if you are wanting to improve your credit score, don’t apply for credit during the interim period.
Only when your credit score begins to show a decent amount of improvement should you try to get a loan again. If you apply any sooner, you risk further downfall in the score due to rejections for bad credit score.
Remember that your credit score cannot be improved overnight. It requires consistent and dedicated effort from your part. So, don’t lose hope, and follow the suggestions above.
And to know more about credit score reports, credit history check and more, know more about Top credit bureaus in India and how they affect your credit score.
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