Can you Fix a Bad Credit Score?
A credit score is a reflection of your financial well-being. The better your score, the healthier your finances are.
Building a good credit score is essential as it can affect your ability to access certain financial products such as credit cards or loans. To fix your credit score, you need to understand what causes a bad credit score. Identifying the factors that are having a negative impact on your scorecard will help you fix it up.
There are four (4) credit bureaus in India, namely – TransUnion CIBIL, Equifax, Experian, and CRIF Highmark. Each of the 4 credit information companies has a scoring model that ranges from 300 to 900. Hence, your credit score is a 3-digit number that is based on your financial activities.
A bad credit score may be a result of an irregular payment history, high credit utilisation ratio, multiple applications for credit cards or loans in a short span of time, or due to errors in your credit report. Remember, credit scores aren’t fixed; they will keep changing as per your financial behavior.
Here are five (5) ways to fix a bad credit score and improve your creditworthiness:
- Review your Credit Report Regularly
Reviewing your credit report will help you identify what is impacting your credit score. Once you understand the factors that are contributing to a bad credit score, you can work on a plan to improve it. Ensure your report doesn’t have any errors. If you find any errors on your report, flag them to the credit information company and get them rectified.
Tip: Analyse your payment pattern and set up a review process to stay on the track for building your credit score.
- Pay your Bills on Time
Payment history is the crucial factor in fixing a bad credit score. If you’ve missed your credit card payment or loan repayment deadline, it will impact your score. Credit companies run a check on your credit report to understand how reliable a borrower you are. Hence, ensure that you make regular payments and on time without missing the deadline.
Tip: Set up autopay for recurring payments. So, the amount will be deducted from your bank account on the due date.
- Keep your Credit Utilisation Ratio Low
A credit utilisation ratio is the percentage of credit that you use out of the total credit available to you. Here’s the formula to calculate your credit utilisation ratio:
Credit Utilisation Ratio = (Total Outstanding Amount on all the Credit Cards/Total Available Credit Limit) X 100
Keep the credit utilisation ratio below or equal to 30% to fix a bad credit score. A high credit utilisation ratio shows higher dependency on credit, which may indicate that you may default on the repayments.
Tip: Create a monthly budget and try to stick to it. A budget will ensure that you do not spend over the board.
- Avoid Multiple Applications in a Short Duration
Applying for multiple credit cards or loans within a short period may raise questions about your ability to take care of your finances. If you want to fix a bad credit score, ensure that you do not end up applying for any credit products back to back. Lenders or credit card companies may consider that you’re struggling with your finances, leading to rejection of your application.
Tip: If you want to compare loan rates, opt for a soft credit pull. A soft credit check doesn’t impact your credit score.
- Opt for a Balanced Mix of Credit Products
Create a balanced portfolio of credit products, such as – a personal loan, credit card, and a home loan or auto loan. Having a mix of credit products in your kitty proves your creditworthiness. Although not having a variety of credit products may not drastically impact your credit score. However, it is recommended to have a healthy mix if you’re trying to fix your bad credit score.
Tip: Always spend as per your repayment capability. If you know that you can manage the repayments on time, go for it, or else your credit score will go for a toss.
Keep up the momentum and be vigilant about the factors that contribute towards building a good credit score. Managing a credit card is one of the most effective ways to fix a bad credit score. Compare credit cards and check the annual maintenance fee before you opt for one. Remember, boosting your credit score overnight isn’t possible. Be disciplined with your finances and work with patience when it comes to building your credit score.
Know where you stand and gain control over your financial well-being to fix a bad credit score.