How to improve your credit score without breaking the bank

A financial setback can have a negative influence on your credit history, making it crucial to adopt targeted strategies to recover its standing. While it's common knowledge that making timely payments and reducing your debts are important, gaining a complete understanding is crucial for a long-term recovery. Financial awareness is fundamental to this ambition, especially for women who have unique financial obstacles including interrupted careers and limited access to conventional loans.

According to a recent Reserve Bank of India (RBI) assessment, a lack of knowledge and awareness about finances results in the denial of credit to almost 60 percent of Indian women. Building a strong foundation in financial literacy is crucial to fixing your credit history and making informed decisions.

Prioritise high-impact accounts

Assign greater importance to accounts that significantly affect your score. For instance, revolving debt like credit card balances influence your credit utilisation ratio—accounting for 30 percent of your score. India's credit card market is now worth over Rs 2.08 trillion (as of 2024), so addressing these balances (paying off your credit card debt at the soonest) can yield faster results than simply paying off instalment loans like personal or student loans.

Also see: 5 essential investment strategies for women to secure financial independence and build wealth

Become an authorised user

If at all feasible, get approval before using a family member's credit card. By utilising the primary account holder's strong credit history, you can rapidly improve your own credit score through a strategy called credit piggybacking, all without taking on more debt. A Credit Mantri survey indicates that almost 38 percent of Indian customers are unaware of the advantages of having an authorised user account.

Apply goodwill letters for short-term problems

Pick up the phone or visit your bank branch. Talk to your banker. Explain your problem to him or her. You may be able to resolve your payment arrears by sending a goodwill letter outlining your circumstances to the creditor. Creditors might remove the negative entry, especially if your overall payment record is solid. This approach is a powerful yet underutilised strategy for credit repair. Recent data indicates that only 14 percent of Indian borrowers have used this method, highlighting the gap in awareness.

See here: 10 practical steps for single women to achieve financial independence

Leverage alternative data

Sign up for new credit programmes by applying through banks or financial institutions, either online or in person. Credit bureaus like CIBIL monitor your credit activity and  use alternative data like utility bills and bank account activity to enhance your credit profile. These tools are particularly beneficial for those with limited credit history and offer a way to build a credible credit history without taking on additional loans. In India, over 80 million individuals are considered "credit invisible", underscoring the need for such alternative data solutions.

See here: Women’s Day 2024: 86% of working women desire to learn financial skills, finds survey

Restructuring debt rather than paying it off

If you have overwhelming debt, think about debt restructuring instead of settlement. Debt settlement reduces your debt but harms your credit, while restructuring extends your repayment terms without negative credit impacts, which keeps your credit history intact and which, in turn, is vital for rebuilding your credit standing. The Credit Bureau Association of India reports that debt restructuring can improve repayment rates by up to 35 percent compared to traditional settlement methods.

Rebuilding your credit is a complex journey that demands more than simple solutions. By using sophisticated strategies and enhancing your understanding of personal finance, individuals, including women, who are recovering from financial difficulties can lay a solid financial base and take back control of their credit well-being. As more support becomes accessible, it's important to use these resources to create a more welcoming financial environment in India.

The author is co-founder, Women on Wealth

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