Credit Score: Check effective steps to improve credit score after default

Credit facilities such as credit cards and personal loans help to meet a wide range of financial needs from big-ticket purchases to home renovation or funding a much awaited vacation. Almost all banks and non-banking financial companies (NBFC) offer various credit instruments based on the credit score of the borrower. If you are looking forward to applying for a new credit card or a personal loan a high credit score could be helpful for faster approval.

The credit score gets negatively affected due to several factors and one of the most detrimental elements for a healthy credit report is default in payments. Any failure in payment of credit card dues or loan EMIs would bring down your credit score. However, by understanding how credit scores work and using a few simple ways you can fix your credit score despite a default.

What is a credit score?

A credit score is a three-digit number that provides lenders an idea about your creditworthiness. A good credit score can increase the chances of your loan requests being approved easily. Additionally, a good credit score can also help you in securing a loan at a lower interest rate. Credit scores are based primarily on your history of repaying loans and credit card dues, types of borrowings and the usage of credit facilities.

Who issues credit scores?

Credit scores are issued by credit bureaus in India. Currently, four credit bureaus operate in India: TransUnion CIBIL, Experian, Equifax and CRIF High Mark. Credit bureaus are governed by the Reserve Bank of India’s guidelines and regulations. They compile credit scores and credit reports based on an individual’s credit history. Financial institutions like banks and NBFCs use these reports and scores to assess the creditworthiness of a loan applicant before approving their application.

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How to check your credit score?

You can check credit score for free on multiple platforms as well as the official websites of the credit bureaus. Digital platforms like Moneycontrol offer free access to credit scores. You can check your credit report for free through the Moneycontrol app and website.

Regularly verifying your credit report can help improve credit score and maintain a high score.

Credit score range

Once you have access to your credit score, it is important to also understand what the three-digit number signifies. The credit score range is based on a scale from 0 to 900. Typically, a higher number refers to a good credit score.

• Less than 300: Indicates no score or no history, meaning you have no credit history. Start building your score to access better offers.


• 300-550: This range signifies a very low credit score and indicates that your credit history is damaged. Check your report and take corrective actions.


• 551-620: This is also a low credit score and does not display good credit behaviour, so immediate improvement is necessary.


• 621-700: This range indicates a fair credit score, meaning you’re close to a strong score. Work on it for better offers.


• 701-759: This is a good credit score, indicating responsible credit usage. Most lenders will consider your applications positively.


• 760+: This is an excellent credit score, showing that your track record is superb. You’re likely to receive the best loan offers from lenders.

*The credit score range mentioned above is indicative and may vary from bureau to bureau.

How a loan default affects credit score

A default on a loan or any other credit obligation typically occurs if a scheduled debt repayment is not made within 90 days. A default of any sort places a severe negative entry in your credit reports. Apart from hampering your credit score, it also has a long-term effect as the default entry will remain on your credit reports for seven years.

ALSO READ: What Affects Your Credit Score & How To Build a Healthy Credit Score

How to improve credit score after default?

While it is advised to not default on your credit debt, individuals often end up in that situation due to reasons such as financial setbacks, job losses and natural or man-made calamities. However, following a few simple steps you can improve your credit score even after a default.

• Try to clear your outstanding dues
  If you have been marked you as a defaulter, reach out to your lender and offer to close the loan. This way you can change the status of a ‘default’ loan to ‘closed’. Post that get in touch with the credit bureaus to get your status updated.


• Get an NOC from your lender
  Once you have cleared your outstanding dues, don't forget to get an NOC or a No Objection Certificate. The NOC will prove that you don't owe anything to the lender anymore.


• Check your credit report The first step of taking charge of your credit score is to check it and see your credit report. You can check the report for duplicate entries or inaccuracies. If you find any discrepancy, raise a dispute with the respective credit agency to rectify the error and update the data.


• Take positive steps to improve your credit score
  It is important to take positive steps to improve credit score. Practices such as paying your monthly instalments and credit card bills on time can increase your credit score. Additionally, paying off existing debts could also be helpful in improving credit score.


• Lower your credit utilisation ratio
  A credit utilisation ratio shows the amount of credit you are currently using compared to the total credit amount available to you. Experts advise you should keep your credit utilisation ratio below 30% of your available credit limit.


• Avoid too many credit enquiries
  It is advised that you do not apply for more loans or make additional credit enquiries after being marked as a ‘defaulter’ by your lender. Multiple enquiries reflect negatively on your credit score, as lenders might consider you as credit-hungry.


• Apply for smaller loans and Credit Cards
  Once you have a stable financial situation, you can start rebuilding your credit history by applying for smaller loans or credit cards and using them responsibly.

Conclusion

A default on your loan could be a setback for your credit score. However, this is a temporary problem which can be addressed with financial discipline. It is important to effectively manage your money and stay committed to reducing your borrowings. This will help in improving credit score even after a default.