OBTAIN
SECURED CREDIT CARD, REPAY REGULARLY TO REPAIR CREDIT HISTORY
Use
less than 30 % of card limit; avoid frequent loan applications
Reckless
use of an unsecured loan (personal loan or credit card dues) can lead to a
default, which impacts the borrower’s credit score negatively. This can lead to
a situation where it becomes difficult or impossible for the person to avail
further credit. Even if they get it, the interest rate is high.
What
is a bad credit score?
Credit
bureaus calculate the credit score based on an individual’s repayment record
and borrowing pattern. A low credit score, typically below 700 (out of a
maximum of 900), can lead to the rejection of loan applications. Credit score
falls when one defaults, delays repayment, or applies for multiple loans.
Improving
a poor credit score requires times and discipline.
Get
a secured credit card
To
build a healthy credit score, one needs to borrow and repay on time, and
thereby establish a sound track record. But if you are in a Catch-22 situation
where you do not have a loan because your credit score is poor, but need one to
improve it, a secured credit card can help.
Those
who are unable to get a credit card or a loan due to absent or poor credit
history may opt for a secured credit card to improve their credit score.
A
secured credit card is backed by a fixed deposit (FD). The credit card issuing
entity marks a lien on the FD and issues a credit card against it. The lender
gives little importance to the person’s credit history or income. The card
limit is set at around 90 per cent of the FD’s value.
At
the end of each month, the credit card user gets the bill. If the entire
outstanding is paid regularly on time, the credit score starts to improve. If
the credit card user fails to repay the outstanding and the amount reaches the
FD’s realizable value, the card issuing bank recovers it by taking over the FD.
Limit
credit utilization
While
using the secured credit card, avoid using the credit limit to the hilt. High
credit utilization can signal to lenders that you are over-reliant on credit.
This can negatively impact your credit score. It is advisable to keep your
utilization low- ideally below 30 per cent of your available credit limit. A
lower utilization rate is seen as indicative of good financial management,
which positively affects your credit score.
Avoid
being credit-hungry
Do
not shop around for loans immediately after getting a secured credit card. Such
loan enquiries can also pull down the credit score, as they are treated as a
sign of credit-hungry behavior. Avoid showing signs of over-dependence on
credit by making multiple applications for loans or credit cards within a short
period.
Every
time you apply for credit, lenders conduct a ‘hard inquiry’ to check your
credit worthiness. Each such inquiry lowers your credit score slightly.
Frequent applications can compound this effect.
Once
you have built a credit score, you may access fresh loans.
Review
credit score periodically
Regular review of credit report not only helps
detect inaccuracies but can help you take prompt corrective actions if the
score is falling. Obtain a copy of your credit report from the bureaus to
detect any inaccuracies or unauthorized activities and address them promptly to
safeguard creditworthiness.
The
credit score is often impacted by an error or even fraudulent activity. Study
your credit report closely to understand the reason behind the poor score.
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