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How to repair a dented credit score

October 26, 2015 15:31 IST

There is no overnight solution and it requires plenty of patience and discipline to set it right

Vikram was shocked to see his home loan application rejected by three different banks though he held a good job that paid well. When he enquired the reason for rejection at one of the banks, he got the answer to his question - poor credit score.

Most of us do not realise the effects a poor score can have on our credit health. It not only reduces your chances of getting credit from financial institutions, but also results in expensive loans on unfavorable terms even if you do get a loan. It is extremely difficult to correct a poor credit score, as the implications are quite severe. Lenders tend to have serious doubts about your credit health and are unwilling to bet their money on you.

Vikram, for example, had to postpone his plans of buying a house, as he could not afford one without a bank loan, and no bank was willing to finance him. He found out from CIBIL that his credit score was 600. The CIBIL score ranges from 300 to 900, and a score above 700 is usually considered safe by lenders. This, of course, varies from one lender to another, but in Vikram's case, a score of 600 made him an unfavorable customer for three banks.

Vikram then set out to repair his dented credit score and chalked out a plan with his advisor on how to go about it. Here's what one can do to improve the credit score:

Pay off loans: Vikram realised that his credit score had fallen because he had not made loan payments on time and some of his credit card dues were still outstanding. He had recently received his annual bonus and used this amount to pay off the outstanding dues.

Even though the outstanding amount may not be very high, a delay in paying even a small overdue amount can result in the deterioration of your credit score. Start paying off large and unsecured loans first - personal loans and credit card debts - which can make a significant difference to your credit score.

Make part payments: In cases where you cannot make full payments, you can consider making part payments. This is what Vikram did for his car loan, where he made repayments in parts. He calculated that if he made a part repayment every month for eight months, he could close the loan.

The first step in making this possible is to cut down expenses and use the savings to pay off the loans.

Discuss options with bank: When your credit score is poor, in many cases, the bank may agree to grant you the loan, albeit with more stringent conditions or at a higher interest rate. It is important to discuss options with the bank.

Also, when you wish to improve your score, you can work out options with the bank on what can best work to make the process easy. You may temporarily increase the EMI amount or may want to make loan prepayments, which can help in improving the score. Discuss with the bank what is possible and what is not.

Employ card cancellation and balance transfer strategies: It is possible to improve credit scores by adopting smart strategies relating to credit card cancellation and credit card balance transfers.

For example, if you hold too many credit cards and want to cancel one, it may make sense to cancel your latest card rather than the oldest one. This is because the older the card, the better indicator it is relating to your credit practices. The older card has a longer history. If you have been regular in your repayments earlier, this will be reflected better in your oldest card.

Similarly, when you transfer balances between cards, it would be better to transfer from your newest card rather than your oldest card.

Avoid EMI reductions or restructuring: Restructuring your loans or opting for EMI reductions will not help in repairing your credit score. In fact, these factors go on to indicate that you are not in a financially comfortable position, leading to lower credit scores or sending the wrong signals to lenders and banks. Avoid such actions, especially when you are trying to repair your score.

Refrain from getting new credit cards: While holding multiple cards can be a luxury statement and sometimes beneficial too, the chances of default when you have too many cards are also greater. This is because of the difficulty in tracking expenses and remembering due dates of multiple cards.

Holding too many cards also signifies that you are credit hungry and will dent your score. When you are on the path to correcting your credit score, refrain from applying for new cards, as a new credit enquiry will negate your efforts to improve your score.

Denting your credit score is very easy. Repairing a dented credit score, unfortunately, is not. There is no overnight solution and it requires plenty of patience and discipline to set it right. Nevertheless, it is still possible with a disciplined approach and smart decision making.

Illustration: Uttam Ghosh/Rediff.com

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