How To Rebuild Your Credit Score Wisely If You Get a Financial Setback

Rebuilding a credit score is like bouncing back after a bad game. You assess what went wrong, make adjustments, and work your way up again. It’s not an overnight fix, but it’s far from impossible.

A good credit score is crucial for home loan qualification because it represents y our creditworthiness to lenders.

A high credit score demonstrates that you have a history of managing your credit responsibly, making you a lower-risk borrower.

This can lead to better loan terms, lower interest rates, and a higher likelihood of loan approval.

So, if you have hit a rough patch, don’t worry. Here’s how you can turn things around to start rebuilding your credit score.

Typically, a score below 500 can render your ineligible for personal housing loans as the score is considered poor for your creditworthiness.

Poor To Excellent Credit Score

Individual lenders have their own criteria regarding the benchmark and a score above 650 is generally considered good, while anything above 750 is excellent for housing loan eligibility.

Credit scores have a direct impact on loan applications and terms. It acts as an important eligibility criterion for getting loans at an affordable interest rate.

Someone with a low credit score can get a home loan, but the interest rate will be higher, leading to larger monthly payments over the course of the loan.

A low credit score can credit also impact other aspects of day-to-day life, such as personal loan or availing of a new credit card.

If you have experienced a financial setback, the first step to rebuilding your credit score is understanding the impact of your financial decisions.

Your credit score reflects your financial habits over time, including how you manage debt and make payments.

Recognizing the importance of your credit score is crucial, as lenders, landlords, and even employers may review it to assess your reliability.

Secured Credit Cards

A secured credit card requires a security deposit, which typically serves as your limit.

This card is designed to help you rebuild your credit by making small, manageable purchases and paying them off in full each month.

On-time payments are reported to credit bureaus, which can significantly boost your credit score over time.

In fact, responsible use of a secured card can lead to an increase in your credit score within six months to a year.

Credit-Builder Loans

A credit-builder loan is a unique tool where the borrowed amount is held in a savings account while you make regular payments.

Unlike traditional loans, you only receive the funds once the loan is fully repaid.

This setup not only helps you build savings but also establishes a positive payment history, which is reported to credit bureaus.

Research shows that consistent payments on a credit-builder loan can improve your credit score by as much as 60 points in a year.

Essential Steps to Fix Your Credit Score

1. Review your credit report

Start by obtaining a copy of your credit report and review it for errors. Dispute any inaccuracies that may be dragging down your score.

2. Pay off outstanding debts

Focus on paying off high-interest debts first. This not only reduces your overall debt burden but also has a positive impact on your credit score when applying for a new loan.

3. Set up payment reminders

Ensure all future bills are paid on time by setting up reminders. Focus on consistent on-time payments.

4. Avoid opening multiple

Refrain score time and from opening multiple new credit accounts in a short period as this can be seen as a red flag by lenders.

5. Maintain old credit accounts

Keeping old accounts helps establish a long credit history, which is beneficial for your credit score.

6. Use a mix of credit types responsibly

Managing different types of credit, such as credit cards and loans, can demonstrate responsible credit use and boost your score,” says Goenka.

7. Seek professional guidance

If you’re struggling with debt management, consult a financial advisor or credit counsellor. They can provide personalized advice and help you create a plan to rebuild your credit.

In short, In India, four major credit bureaus provide credit scores based on your credit history, payment behavior, and borrowing patterns.

These are CIBIL (Credit Information Bureau India Limited), Equifax, Experian and CRIF High Mark. “The timeline for improving your credit score can vary with several factors, including the severity of past credit defaults, the length of your credit history, and your current credit management practices.

Consistent, disciplined credit behavior can help your credit score recover within three to six months.

However, in more severe cases, it may take up to a year or more to see significant improvement.

While moving from a good to an excellent score might be relatively straightforward, moving from a poor to a good requires consistent effort.

Many people, in their eagerness to improve their score, fall into traps that can do more harm than good.

Therefore, understanding the laws and regulations that protect you as a borrower can prevent you from being misled or taken advantage of.

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