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- Guide to Improve Your CIBIL Score if Below 550
In the latest monetary policy meet held on March 24-27 2020, the RBI has decided to give a 3-month moratorium period for all outstanding loans as on March 1, 2020. Remember, this is not an EMI WAIVER. The move is in line with the economic pressures induced by the Coronavirus outbreak. So, this could mean some savings for you on your loan and help you deal with the likely situation of less or no income. Your credit score will not reduce if you don't pay the EMI. But doing so can raise your interest liability as banks would like to cover their losses, which is likely to be the case on deferred EMI payments, by increasing the interest component of the EMI after the moratorium period gets over. So, if you have the money, keep paying to reduce your interest liability. The moratorium, which was ending on May 31, 2020, has been extended till August 31, 2020.
While chatting with my friend Sushil Mehta a fortnight ago, I got to know his plans to buy a 2-BHK flat in Dwarka, New Delhi. When quizzed on the income, he hesitated a bit but finally revealed his net monthly salary of ₹85,000. Then I asked him to tell me the cost of property, which he revealed it to be ₹50 lakhs. After that, I went online to check out the likely EMI on his loan. It came around to be ₹50,000 at an assumed interest rate and tenure of 8.50% per annum and 20 years, respectively. I told him that and he was okay with the EMI. And so, he made a loan application online at that very moment.
A couple of days later, though, came a shock in the form of rejection. The lender cited his poor credit score for the rejection. His CIBIL score was below 550, deemed poor by the lender. CIBIL, as you would know, is one of the leading credit information companies in India involved in assigning credit scores and providing reports to individuals with a credit history.
He was almost in tears while sharing this news with me. But it’s not only Sushil who is battling such a situation, there are many facing rejections on account of the same. The sad part is that they don’t even know how to improve it and thus fail to realize their dreams in their lifetime. So if you are stuck with a CIBIL Score of less than 550, this article will guide you effectively to improve your score. So, stay tuned.
Table of Contents
- 1 Steps to Improve Your CIBIL Score
- 1.1 Timely Payments
- 1.2 Pay Dues in Full
- 1.3 Keep a Lid on Credit Utilization
- 1.4 Pay Off Your Card Balance via Personal Loan
- 1.5 Don’t Exercise Debt Settlement
- 1.6 Avoid Withdrawing Cash from ATMs
- 1.7 Avoid Making Too Many Credit Enquiries
- 1.8 Don’t Make Too Many Applications Within a Short Period of Time
- 1.9 Check Your CIBIL Report Thoroughly
- 2 Definition of Income Needs a Change to Know Your Spending Limit
Steps to Improve Your CIBIL Score
As the score is below 550, you may have defaulted for a period of around a year or so, presumably. The reasons for a poor score can be any of the following.
- Delay in Payment of Loan EMIs or Card Dues
- Excessive Credit Limit Utilization
- Revolving Credit on Credit Cards
- Making Too Many Credit Enquiries Without Any Approval
You can follow some of the steps that help raise your CIBIL score from 550. Wanna know those steps? Take a look below.
Most fall into the trap of impulsive buying tendencies, particularly with a credit card that offers you the convenience to shop anything from anywhere at anytime. With such injudicious spends, the bills rise beyond your ability to pay on time. So if injudicious spends account for your delay or default in the payment, you better avoid that. It not only lowers your credit score, which right now is below 550, but also add late payment charges and taxes to the bill. So the bill amount which you see now must be very high to pay on time, raising the possibility of a further dip in your score.
Restrict those impulsive spends right now so that the bills won’t rise beyond a point. If possible, do not spend on the card for at least 3-4 months to stem the rise in card bills. At the same time, keep a lid on other expenses so that you could create a pool of savings to pay the bills on a timely basis. Continuing this practice will keep raising your score.
Pay Dues in Full
Most fall prey to the teaser of minimum due that credit card companies offer while generating your bills. The minimum due is calculated at about 5% of the outstanding balance in a particular billing cycle. One does escape late payment charges by paying the minimum due, but interest and taxes do add to the next bill. Also, the credit score goes down paying the minimum due only.
So, it’s advisable to pay your credit card dues in full to prevent interest and taxes to add on your bill. Paying the entire dues on a regular basis will raise your score gradually.
Keep a Lid on Credit Utilization
A credit utilization ratio indicates the extent of the credit utilized in proportion to the limit offered to a borrower. You can be offered a credit limit of ₹80,000 on your credit card. But it does not mean you should use the entire portion. A higher limit utilization makes CIBIL perceive you as credit hungry and thus brings down your score. Keep the utilization ratio below 30% to 40% to get the score moving up all the time.
Pay Off Your Card Balance via Personal Loan
Faced with a mounting credit card debt? Is this the reason for your default? You better then opt for a personal loan to pay off the card dues. Let me tell you that a personal loan comes with a much lower interest rate of 11%-25% compared to 30%-40% of credit cards. Your card balance gets paid off instantly with the same. In return, you can pay off your personal loan in easy EMIs, calculated at a lower interest rate. This will help you repay comfortably and raise your credit score in the process.
Don’t Exercise Debt Settlement
Looking at the mounting debt, you could look to reduce it by signing the debt settlement agreement with the lender. No doubt, it will cut down the size of the debt. But doing so will indicate your inability to repay the debt, thereby adversely affecting your score and almost shutting the door for any fresh credit application.
Avoid debt settlement at any cost if you want to maintain a good credit health. However, if you have already settled your debt, you are most likely to face the rejection of fresh loan applications. You can, though, get a loan or card by submitting the collateral such as fixed deposit. The quantum of loan or credit limit will be given at a certain percentage (80%-90%) of the FD amount. Even then, you need to pay on time to raise your score. Some of the credit cards offered against fixed deposit include SBI Unnati Card, ICICI Bank Coral Credit Card, ICICI Bank Instant Platinum Credit Card, Axis Insta Easy Credit Card, etc.
Avoid Withdrawing Cash from ATMs
Hope you haven’t fallen into the lure of cash advance limits offered on your credit card. However, if you have, you better pay the outstanding bills ASAP. Doesn’t matter if it requires you to touch on your savings surplus of fixed deposit, recurring deposit, mutual funds or any other financial instruments. The problem with withdrawing cash from your credit card is that the interest starts to accrue from the point of instance, unlike a retail purchase where a cardholder is given 20-50 days of interest-free credit. The bills rise much more with cash advance and the score goes down in a flash. So, it’s a cardinal error which you can commit at your own peril.
Avoid Making Too Many Credit Enquiries
A greater number of CIBIL enquiries can pull down the score faster. Do not check the score so often. Three and more enquiries in a month can lower your score if faced rejections all the time.
Don’t Make Too Many Applications Within a Short Period of Time
It’s a tendency to apply for too many credits within shorter intervals. Not only the score falls but also the rejection mounts doing so. Ensure you maintain a reasonably higher gap between the debts to make lenders believe you are not chasing credit.
Check Your CIBIL Report Thoroughly
You can check your credit report online and see if there are any discrepancies in terms of your name, date of birth, e-mail ID and PAN number. If you find any, report it to CIBIL immediately. Also, report any discrepancy you find in your loan or card account to the bureau. This could improve your score if it has gone down due to the discrepancy.
Taking these points into consideration, you can get your score improved to 700 and beyond in a year, paving the way for a smooth approval to your credit application.
Definition of Income Needs a Change to Know Your Spending Limit
As of now, you must have got to know the key to a good credit score lies in paying off the loan or card dues on time. For a timely payment, it is indeed important to keep the spends under control, isn’t it? Ideally, the total expenses must not exceed 40%-50% of your income. With a running loan or credit card, though, the effective income reduces and so you should spend accordingly.
For example – Ravi and Kishan earn ₹60,000 a month. While Ravi is servicing a home loan EMI of ₹20,000, Kishan is free of any credit. In that way, Ravi’s effective income is reduced to ₹40,000, compared to no change in the case of Kishan. So, Ravi should spend taking into account his effective income of ₹40,000 post the deduction of EMI and not ₹60,000 which is his take home salary.
You also need to do the same if your situation corresponds to Ravi’s. Tightening the spends would leave you with a reasonably higher amount for debt repayment and contingencies, if at all they arise. With a regular payment of the debt, your credit score will start to move upwards.
Cut Down on Your Dining & Other Expenses
Yes, the discount offers on dining via credit cards can tempt you to eat outside more often than not, resulting in footing the bill beyond the level of your comfort. You can even purchase your other requirements using the credit cards. But when the bill comes to your mailbox, you see both total dues and minimum due, with the latter getting calculated at around 5% of the former.
The minimum due would seem within your ability to pay back to the lender and so you do that. What happens then is that you fall into the never-ending debt trap as the credit keeps revolving around, decreasing your credit score. So, you need to know your spending limits to stay out of the debt trap. Spending within a limit would help save the money needed to pay your card dues in full. Doing so will raise your score gradually.