A credit score is simply a bank or any financial institution’s way of determining if you’re worth lending money to. It’s essentially a score with a maximum of 900 that tells the lender how trustworthy you are.
While there are a whole bunch of places you can check it online, the general thumb rule is to check it once in a few months. Just so you know where you stand and what you can do to improve it.
A credit score is a good-to-know fact about yourself, financially speaking. It’s one of the many parameters of your financial health, so to speak. A high credit score would naturally mean you have a better chance of getting loans or highly rewarding credit cards, and so on. A bad one, on the other hand, will mean you may not be able to get access to a loan at the time of need.
A credit score is a 3-digit number assigned to you by a credit rating agency. It starts at 300, which is the lowest credit score, and goes all the way up to 900, which is the highest.
A score between 300 to 550 is considered a bad credit score. Financial institutions usually don’t offer any sort of credit facilities like loans or credit cards to those with low scores. And the few institutions that do would most likely charge exorbitant levels of interest to cover the risk involved with lending to such individuals.
Without getting into the whole long list, typically, not paying your bills on time is the most common reason for a bad credit score. That aside, utilising all or most of your credit limit also impacts your credit score negatively. Let’s say you have a credit limit of ₹80,000. Consistently exhausting ₹80k on your credit card, or even anywhere over ₹60k a month, on consecutive months, can slowly erode your credit score.
If your credit score is poor (below 500), that’s bad, but not all is lost. Over time, you can improve your credit score. Just like you would with your cholesterol or blood sugar, to use a health analogy. Here are things you can do to help it:
Not paying your loan or credit card bills on time is one of the major factors that leave a negative impact on your credit score. Take a closer look at your repayments. Are you paying just the minimum amount? Are you paying it on time?
Work towards paying your debt off, on or before the actual due date. However, remember that this takes a while, and it could be a few months before you actually start to notice your credit score going up.
If you’re someone who has either overutilised their credit card or has too many credit facilities (this could be multiple credit cards or loans) in your name, you might be setting yourself up for a bad credit score. This is simply because credit information bureaus take ‘credit utilisation’ and ‘credit mix’ into consideration when assigning scores.
If you find that you have exceeded 30% of your total credit card limit, you might want to scale back and bring the figure down to less than 30%. This can have a huge positive boost on your credit score. Also, if you have multiple loans, consider closing them off by taking out a debt consolidation loan. This would not only reduce the number of your loans you have, but can also make it easier for you to keep track and make repayments on time.
Generally, banks offer credit cards only to people with a reasonably high credit score. That doesn’t mean that you cannot apply for one if you don’t have it. As a matter of fact, you can get a credit card even if you’re stuck with the lowest credit score by opting for a secured credit card. You can read more about a secured credit card and how it works here, before making up your mind.
A secured credit card is issued against a fixed deposit that you have with a bank. Since you’ve essentially offered your FD as a collateral, which covers the risk, banks don’t look at credit scores. This allows individuals with zero credit history and bad credit scores to get a secured credit card by offering their FDs as collateral.
Once you get your hands on a secured credit card and start to use it regularly, you start creating credit history. And as you continue to make repayments on time, your credit score also gets a huge boost. That said, remember to keep your credit utilization ratio below 30% at all times since it can also play a big role in increasing your score.
This is another great tip that you can use to recover your credit score. If you need a credit facility, but are unable to apply for one due to a bad credit score, you can consider roping in a co-signer or a co-borrower. As long as the co-signer has a good credit score and is financially stable, banks generally tend to offer the credit facility you seek.
Once you’ve availed the facility with the help of a co-signer, make sure to repay your obligations on time consistently. Your credit score should begin to recover within just a few months.
Now that you know what a bad credit score is and how to build credit with a bad credit score, you can use these details to your advantage. The bottom line is that while a bad credit score is certainly an unfavorable financial situation to be in, it can be rectified if you follow the steps outlined above. The sooner you fix your credit situation, the easier it will be for you to borrow funds and achieve your financial goals.
Any credit score below 600 is typically not ideal and is considered a bad credit score. This is particularly true if your credit score falls in the range of 300 to 550.
Any credit score below 550 is typically considered a poor rating. The lowest credit score you can have is 300.
To fix your credit score as quickly as possible, you could try repaying most or all of your outstanding dues. Doing this once isn’t enough; you’ll need to maintain a consistent early repayment behaviour to improve your score over time.