Friday, 11 March 2016

What Is a Bad Credit Score? 5 Things You Should Know

Credit health is an important determining factor for borrowing funds from banks and other financial institutions. A bad credit score can cause lenders to turn down a person’s request for a loan. Although there are no set standard scores, a good credit score is anything from 750 and above, while a score below 600 is considered as bad or poor. Lenders generally tend to be very apprehensive about lending to individuals whose scores fall between 300 and 600. Loan applications are often denied, and if at all a financial institution agrees then they are likely to charge a very high interest rate. They may also take into consideration such loan applications in exchange of collateral.

If a bad credit score is keeping you from getting your desired loan, here are the 5 things you should look at:

  • Are you aware that payment history accounts for 35% of the credit score? An applicant’s payment history is the first point any lender wants to see. If you have been inconsistent with payments then keep in mind that late payments attract late fees. This negatively impacts your credit score. Making payments before the due date will definitely help improve credit score. However, not having any late payments will not give an individual full score as the payment history is just one aspect that goes into calculating the credit score.  

  • Each time a new credit is applied for, the financial institutions will run an inquiry on your credit report. This holds a 10% weightage when assessing the credit score. It reflects poorly on the applicant when too many institutions seek credit information at the same time and this negatively affects his or her score. Opening a number of different credit accounts show greater credit risk. When it is shown in the credit report that the individual has applied for various new credit lines during a short span of time, the credit scores can go down.

  • Holding a mix of various types of credit accounts for about 10% of the credit score. If an individual only holds unsecured loans then his or her credit score will be affected. It is important to have a healthy mix of secured and unsecured loans - possibly 80% in secured loans and 20% in unsecured loans. A car loan or a home loan can work to one's advantage as compared to a personal loan. However, keep in mind that 35% of a person's credit score is dependent on repayment history and so whatever kind of loan one has taken, make sure that it gets paid in full. Maintaining the right mix of credit and repaying it on time is another means to improve credit score.

  • Avoid falling into the credit card debt trap - maintaining a healthy credit account makes it easy to send out a loan application. However, it is important that one avoids falling into the credit card debt trap. It can result in missing payment deadlines, spending beyond one’s means etc. Holding one credit card is advisable rather than numerous credit cards from different credit card companies. It also helps to sort out any pending issues with the credit card companies.

  • Repairing one’s score begins with checking the credit report for errors. A credit report contains all information about a person’s borrowing history. It is important to review the report as the information contained in it determines whether the applicant gets the loan approved or not.  Check the credit report to see if any payments are listed incorrectly. In case you come across any errors in the report then notify the credit bureau at the earliest. Correction or rectification of any errors on repayment could help you improve credit score.

Getting a bad or poor credit score is not the end of the road. Some financial institutions will be open to lending funds in exchange of high interest rates. Additionally one can approach small co-operative banks that are not part of CIBIL yet. Keep a check on the credit history - possibly 3 times in a year. Ensure that the score only keeps building up. Financial planning is crucial if one wants to steer clear of any debt trap. Calculate how much income one makes versus how much is spent in a month. Take control of the finances and get into the habit of effective financial management at the earliest, as it can help save money and safeguard your future.

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