If you know what credit score is and what it helps with, there are hardly any chances that you would fumble anytime in not taking it seriously. But what if someone is new to this concept? What is a credit score? What is it’s importance? For the starters who don’t know what is credit score, it is a 3 digit number ranging from 300-900 where 900 is highest.
The score is made up of five parameters. Viz. Payment History, Credit Utilisation, Length Of Credit History, Credit Mix and New Credits. All these five points have different weightage and would make the score. Though the parameters and The weightage remain the same, the score differs from person to person. Because the mix of these five parameters would differ for everyone.
It is much required to know the basics of any concept. How is the score calculated, what affects the score how, what measures can one take in improving the score, what can be done to make it always above 750 etc? First of all, the credit score is important in order to get any credit or loans. And credit score is made also after taking any loan. So this is a catch 22 situation. But, initially, a small loan or even a huge loan or credit is approved seeing your income and assets. But once you get that credit, you must take proper care in maintaining the regular payments. Not missing or delaying on them. Let us now understand what a low or a bad score can do to you.
“While I was applying for a home loan for the house I always wanted, I was facing rejection from whichever bank I applied for. I went to 5 banks, and that’s not at all small number. I have been working for 11 years from now. My salary is beyond the expectations of banks which require for approval of the loan. But why rejection?” This is a concern for Raj, who is 32 and an AVP in a multinational company. When investigating, Raj came to know that his score was 480. That is way below the expected score a bank or an NBFC to approve for a loan. And this was the only reason why his loan application was getting rejected!
How to improve credit score in such case? A low credit score has major 2 reasons. Series of late payments or just paying the minimum payable amount of credit card bill and the second one being the defaults. While trying to improve the score, try to clear all the old debts. If any old accounts are open, which the payments have not been made, clear them. If you do not have enough amount, take a small loan, even with higher interest rates, apply for one. Clear the defaults. Become a sensible payer. Make sure you pay the credit repayments on time. Do not utilize your credit card for more than 35% of its total credit limit. There is no rocket science in improving the low credit score. All it needs is the sincerest efforts. Start from a credit card. Pay the old credit card bills. If your credit card limit is one lakh, use 35000 max each month. If the usage is more than that, apply for one card and use the mix of both. Check the credit report. There can be a case of identity theft i.e. someone else might have used the credit on your name. If that, raise the dispute, let bank and credit bureaus know the issue. Speak to the bank manager. If there are any wilful defaults, speak to the creditors and explain the conditions. They might wave off surcharges. Try paying the base amount. When done this for a few months the score will start improving.
With clearing old credits, open a new credit account and show the seriousness towards it. Over a period of time, the score will be improved. And it's not a difficult task. Be responsible enough and little efforts would make a difference!