To get approval for any formal credit, the lender will first check your credit score. A credit score is a 3 digit number which ranges between 300 and 850. The closer the credit score is to the 850 mark, the better your credit score is and vice versa. A credit score tells the lender how likely are you to pay the borrowed debt on time. Any credit score above 700 is considered to be good and above 800 is considered to be excellent.
The higher your credit score is more are the chances that any oan you apply for in the future will be approved. For any person who has a low credit score due to some reason or the other, it is not easy to get approval for a loan or credit card. Hence, a person should always try to maintain a good credit score.
How to Fix Your Credit Score?
Having a low credit score does not mean the end of the world. You can still get approval for items to buy on credit or take a loan and slowly with time you can improve your credit score by making payments on time. The only disadvantage for a person with a poor credit score who is buying something on credit or taking a loan is that the rate of interest on the loan or credit will be higher than that for a person who has a healthy credit score.
If you have a bad credit score and want to apply for a loan, it is a good idea to get prequalified. The advantage of getting prequalification done before applying for a loan is that it will give an estimate of the loan amount that you are eligible for. This in turn will allow you to manage the amount of money you spend while shopping.
There are false myths stating that prequalification will have a negative impact on the enquirer’s credit score although even after prequalification of the credit score, it is not necessary that the loan will be approved.
The decision whether your loan will be approved or not depends on factors beyond the credit score. Some of the factors that determine whether a loan is approved or not include the debt to income ratio, whether the previous credit amount has been repaid on time or not etc. Another factor that might swing the approval of loan in favour of the person with a poor credit score is the amount of upturn in the credit score at the time of applying for the loan. If the upturn in the credit score is a significant margin, the lender might change his or her decision to reject the loan application.
If still you are unable to get approval for a loan, you can try other options such as:
- Taking loan through another person’s account who has a healthy credit score by becoming an authorised user.
- Applying for a loan application by becoming a co-signer with another person who has a healthy credit score. The lender will consider both you and the person on whose account you have become the co-signer equally responsible for paying the debt on time.
- You can also open a secured account. By obtaining a secured credit card account you can deposit the cash in the account and borrow money upto a certain limit.
Steps to Improve your Credit Score
If you have a poor credit score and want to convert it into a healthy one, you can follow the steps mentioned below:
- Start making your credit payments on time if you are not doing it. Making late payments and defaulting on it negatively impacts your credit score.
- Your credit utilization ratio should be healthy. Credit utilization ratio is nothing but the amount of credit limit you have available and what share of it are you utilizing.
- Improve the current debt amount you have.
- The type of credit a customer takes also affects his or her credit score.
- Make only a certain number of hard enquiries about your credit score. If you make more hard enquiries about your credit score than necessary, it will negatively impact you credit score.
- Maintain a zero balance on your credit. This will definitely help you improve your credit score.
- Keep the public records such as tax liens and bankruptcies clean.
- If you are still struggling to improve your credit score even after following the steps mentioned above, you can approach a approved credit counselling organisation. The organisation will advise you various ways through which you can improve your credit score.
- Another option to change your credit score from a poor one to healthy one is to practice data consolidation of your credit. In this process, all the different credits that you have are consolidated as one form of credit and the rate of interest is also lower than the others. This is definitely a way of ensuring your credit score improves over time.
Before taking steps or approaching organisations, carefully verify the path you are going to tread to improve your credit score. Improving one’s credit score takes time and cannot be done instantly. Be wary of all those organisations that claim to improve your credit score in no time.
Before you take any step, check your credit score on CIBIL or Experian. Also, once you get a hang of the reasons as to why your credit score is low, you can work on negating those factors and improving your score which is much better than swinging fruitlessly in the dark.
Keeping your credit score is important for taking any sort of credit or loan in the future, hence you should know about the actions that could damage or enhance it.