Five simple steps to rebuild your credit score

Ranjit PunjaCreditmantriHave you applied for a loan or credit card and been shocked that your application has been rejected because of your credit score? Or been told that your poor credit score doesn’t qualify you for the best interest rates? It’s never too late to start rebuilding your credit score and being eligible for the best that the credit system can offer you. Here are five simple and practical steps you can take, starting now, that will help you increase your credit score. First, obtain a copy of your credit report. Often, your report will contain reporting or administrative errors that needlessly drag down your score. For example, your name or address might be wrongly noted, your credit limit misreported, or the status of a loan account not been updated. At worst, some of these mistakes might signify ID theft and fraudulent activity. Getting these errors rectified can have an immediate positive impact on your score. Two, start paying all your bills on time and in full, from today. Your repayment behaviour makes up almost one third of your credit score so having a perfect repayment record on your loans and credit cards can have a tangible beneficial impact on your score. Conversely, every late, partial or missed payment is reported by your lenders to the credit bureaus and leads to a decrease in your score. Paying all your bills in full will require some belt-tightening in the short term, but the long-term impact on your credit score and overall credit health is well worth the spending sacrifice.Three, if you have bad credit, apply for a secured credit card to boost your score. A secured card is issued against a fixed deposit with the bank that issues your card. The bank uses the FD as collateral in case you default on your payments. Since their money is safeguarded, they are willing to issue the card to customers who have poor credit as well, unlike a regular credit card. The bank reports all your payments to the bureau on this card as well, so having a good repayment record will cause a spike in your credit score. Four, keep your credit balances low. Make sure that you do not exceed more than 50 % of your credit limit. Many people mistakenly believe that as long as they do not exceed their total credit limit, they are not affecting their credit score. However, lenders also look at your credit utilisation ratio (the proportion of your actual spending to your credit limit). A high credit utilisation ratio implies lack of spending discipline and potential credit problems. For example, if your credit limit is Rs. 1 lakh, make sure that you do not spend more than Rs. 50,000 on your card on a monthly basis.Five, do not apply for credit (whether loan or credit card) if you have a poor credit score – unless it is for a secured credit card. Every rejection further decreases your score. Only apply for a loan or card once you are credit-worthy or you run the risk of entering a downward credit score spiral, where applying for credit with a poor credit score and being turned down, leads to further worsening of your score. All these steps only require a certain amount of patience and spending discipline. Like a successful diet plan, once you see the results, you will remain committed to your new healthier credit habits.