Credit score makeovers: Transforming bad credit into good credit

Credit scores indicate a person’s financial health and can impact insurance rates, apartment approvals, and job prospects. A good credit score signifies a positive financial situation, and understanding its importance and how to build it can help individuals take advantage of its benefits. Transforming bad credit into good credit is a process that requires time, discipline, and responsible financial management.

The CIBIL score ranges from 300-900, with a score closer to 900 for optimal loan interest rates. Most lenders consider a score of 750 or above, indicating a strong credit rating. To improve a bad credit score, one should understand the main credit factors like timely bill payments and credit card balances, identify negative impacts, and check for errors in the credit report.

Having a longer and positive credit history generally increases the probability of availing a loan easily. Credit scoring models often take into account various factors, including the length of credit history, on-time payments, and keeping credit card balances low. Users having maintained a good credit record for around 5 to 10 years are more trusted by lenders and carry more weightage in their financial portfolio.

Maintaining a high credit score increases the likelihood of qualifying for credit and better interest rates. Low scores can hinder affordable credit or loan approval. Maintaining good credit is like preventive medicine, helping an individual handle unexpected situations like sudden changes in life. Lenders generally keep track on a borrower’s credit score through four major credit bureaus – TransUnion CIBIL, Equifax, Experian, and CRIF Highmark.

A bad credit score can lead to potential rejection for loans, rental applications, security deposits, and cell phone contracts. It can also cause issues during an employment background check, where employers may view a limited version of the credit report to verify information on application or evaluate financial management skills. Additionally, it can result in higher insurance premiums in some states, as car insurance companies often use information from the credit report in addition to driving history.

To effectively transform bad credit into good credit one should constantly keep a track on the credit report, make corrections to errors, note credit utilization ratio, stop applying for credits if rejected, keep the application frequency low, pay loans on a timely basis, prefer not to settle loans or credit card debts, get a mixed bag of credit, watch out for joint applicants and opt different type of credits. Moreover, borrowers should try not to exceed 40-50 per cent of credit card limit utilization.

It is always recommended to maintain high / impulsive purchases in accordance to EMI payment capabilities so that it doesn’t get costly while paying off credit card bills. Users should always pay their credit card bills before two working days from the date of due payment.

Regularly checking the credit report is crucial for identifying and correcting negative information on the credit score. It will reveal the defaults or delayed payments on loans or credit cards that have negatively affected the score. If an individual notices any errors, s/he can contact the bank and CIBIL to rectify the situation. To improve the credit utilization ratio, one should avoid using credit card for all transactions and keep it at 30 per cent or less. For smart financing, people should also avoid applying for loans or credit cards repeatedly as this information will be recorded in the credit report.

Paying loans on time and restructuring debt if needed is another effective way to manage credit scores. One should avoid settling loans or credit cards, as settlements can negatively impact the score and bank willingness to offer fresh credit. It is always suggestible to take a mixed bag of credit, including both unsecured and secured loans, such as personal loans and car or home loans.

A bad credit score can damage future credit requirements, but it is not completely beyond repair. It takes at least a few months for scores to show improvement. People should opt for different types of credit, such as a mix of secured and personal loans, long- and short-term loans, and timely repayments to improve credit score.

(The author is CEO & Founder, PayMe, Views are personal.)