Five smart financial moves to recover from a low credit score

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Credit score is one of the first filters factored in by lenders while evaluating loan and credit card applications. Many lenders have also started considering it while setting the interest rate of the loan. Hence, those having lower credit score have lesser chance of availing a loan, or are charged higher interest rate for the same. Here are 5 ways to improve your credit score:

Ensure timely repayment of EMIs and credit card bills

Credit bureaus are believed to assign maximum weightage to credit repayment history, among other factors, while calculating your credit score. Any delay or default in repaying EMIs and credit card dues are reported by the concerned lender and credit issuers to the bureaus, who then reduce the credit score accordingly.

Hence, you must try to repay EMIs and credit card bills by the due date. Regular repayment would automatically build and improve your credit score.

Restrict your credit utilization ratio (CUR) within 30%

Credit utilization ratio is the proportion of the total credit card limit utilized by you. As lenders usually consider applicants with CUR of above 30% as credit hungry, bureaus tend to pull down your credit score by a few points on breaching this 30% mark. Hence, credit card users should always aim at restricting their card spends within 30% of their total credit limit. Those who frequently breach the 30% mark can either request existing card issuers to increase the credit limit or opt for additional credit card(s).

An enhanced credit limit will automatically reduce your CUR, provided you do not overspend after obtaining a higher credit limit.

Review your credit report at periodic intervals

Credit bureaus calculate your credit score on the basis of the information provided by the lenders and card issuers. Hence, any incorrect information, clerical error or a possible fraudulent credit activity listed in your credit report can reduce your overall credit score. The only way to detect such inaccurate information is to periodically review your credit report – at least once every three months. Report such inaccuracies, if any, to the concerned credit bureau and lender/credit card issuer at the earliest for rectification. A rectified credit report will automatically sport a higher credit score.

You can pull out one free credit report every year from each of the four credit bureaus operating in India. Alternatively, visit online financial marketplaces to check free credit reports along with monthly updates.

Refrain from applying for multiple credit and loan applications within a short span

Each time you submit a loan or credit card application, the lender assess your creditworthiness by requesting your credit report from the bureaus. Such lender-initiated credit report requests are termed as hard enquiries. Such enquiry can pull down your credit score by a few points.

Hence, making multiple credit card and/or loan enquiries within a short span can lead to the faster depletion of your credit score.

Instead of directly applying for a loan or credit card with multiple lenders, visit online financial marketplace to compare various credit card or loan offers available on your credit score, income and other eligible criteria; and then apply for the optimum one. Although such marketplaces also pull your credit report while extending various loan and credit options, such credit report requests are considered as soft enquiries by the credit bureaus and hence, do not impact your credit score.

Review repayment activities of co-signed/guaranteed loan accounts at regular intervals

Whenever you agree to co-sign or guarantee a loan account, it makes you equally liable for the timely repayment in the co-signed or guaranteed loan account. Any irregularities in the repayment of co-signed or guaranteed loan accounts would also adversely impact your credit score.

Hence, make sure you track and review repayment activities of loans co-signed or guaranteed by you. As repayment activities of the guaranteed or co-signed loans are also included in your credit report, reviewing it at regular intervals would allow you to track guaranteed or co-signed loans.

(The author is Chief Product Officer, Paisabazaar.com. Views expressed are personal)