Things to Do When Your Credit Score is Poor


  • What should you do when you have a poor credit score? The first step would be to check your credit report.
  • The report might show irresponsible repayment history, higher credit utilization as reasons - Read here how to correct these mistakes

A person would always like to lend money to someone whom he/she trusts and who always pays back money responsibly. Now zoom out a little bit and see this scenario from the angle of a bank or financial institution. How does a lender trust you when extending credit or lending money? Well, the answer to this question is Credit Score, which is a 3-digit score that defines an individual’s creditworthiness. If an individual has a poor credit score, he or she may face difficulties in getting a loan or credit card. People often ask, what are those things to do when having a poor credit score?

Before knowing about these things, you should know what is a poor credit score? The credit score ranges from 300 to 900 and leading credit bureaus such as CIBIL, Equifax, Experian provide credit scores to individuals. Anything below 650 is considered to be a poor credit score and a score of 750 or above is considered good. So, if your score is below 650 and you are looking to find those things that you need to improve, this article is for you.

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Here, we will talk about all those things that you need to do when you have a poor credit score. Keep reading to know all of them in detail!

First Step to do If You Have a Poor Credit Score

If you have a poor credit score, the first thing you would ask – ‘Where should I start from?’ Well, the first step would be to check your credit report, see the reasons for a poor credit score and start rectifying the errors that have accounted for a poor score. These reasons can differ from one person to another person as everybody has a different spending habit and lifestyle. You would be thinking about how a credit report would help in identifying the reasons for a poor credit score? Consider your credit report as an equivalent to your financial scorecard that has all your financial transactions such as Debt, Repayment, Credit Enquiries, Utility Bill payments, etc.

Some of the most common reasons behind a poor credit score are Irresponsible Repayment Behavior (untimely repayments), Higher Credit Utilization Ratio, Poor Credit Mix, Too many Hard Credit Enquiries, Debt Settlement, Closure of Oldest Credit Card account, etc. An individual may have one or more than one reason for a poor credit score.

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We will be discussing each of these reasons one after another. Also, you can know how to rectify them so that you can improve your credit score. Have a look!

Faulty Repayment Behavior

One of the most important things that people do not know is that their repayment behavior can affect their credit scores substantially. The reason: repayment history carries 35% of the overall weightage to your credit score that is highest among all the aspects. One of the main reasons for a poor credit score is the irresponsible repayment behavior of people. Your credit report will show all the missed repayments and defaults you made on your Credit Card Bill payments or Loan EMI payments. So, how to rectify this problem and improve your credit score?

Restrict or abandon fresh credit card purchases until your repayment gets in order, as well as say No to unnecessary expenses. It will help ensure timely payments. When you always pay your credit card bills and loan EMIs on time, your repayment history will have a positive impact. It will help you build your credit score gradually. Rectifying the faulty repayment behavior is in your hands and once you develop a habit of timely repayments, there’s no stopping to it. Your credit score depends directly on the percentage of timely repayments, so always pay your debt on or before the due date. Also, you should not make credit card spends beyond your repayment capacity. This way, you will be able to repay your credit card bills on time.

Higher Credit Utilization Ratio

One of the other major reasons behind a poor credit score is a higher credit utilization ratio. Before getting deep into it, let’s understand what is meant by the credit utilization ratio? This ratio is the percentage of the utilized limit in a month of the total available credit limit. Let’s say that the overall credit limit of an individual is INR 72,000. He spent INR 54,000 in a month. Then his credit utilization ratio will be 75% [(54,000/72,000)*100]. It means that he utilized 75% of the overall credit limit in a particular month. Lenders always advise keeping this credit utilization ratio to 30% or below. This means if you have a credit limit of INR 50,000, you should not spend more than INR 15,000 in a month. Also, set your spending limits based on your in-hand income. This way, you can keep the bill within control and pay the dues on time.

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One of the major reasons for having a poor credit score is people keep spending over this ideal ratio for a long time that makes lenders see them as credit-hungry borrowers. Spending more than the ideal ratio over a long period impacts your credit score negatively. So when you keep your credit utilization ratio low (30% or below), chances of maintaining a good credit score are pretty high. When you spend more than your repayment capacity, you can also end up missing repayments. So, when you have a poor credit score, put a hold on your credit card spendings.

Multiple Hard Credit Enquiries

If you have applied for multiple loans and end up availing zero additional credit, this will show in your credit report and you will have a poor credit score. Let’s understand how! When you apply for any credit card, mortgage or any other loans, lenders pull an enquiry whether to provide you with a credit or not. Such enquiries are known as Hard Enquiries. One of the prominent characteristics of this is that it affects your credit score every time a lender pulls an enquiry. For example, if you applied for a loan at 4 different lenders, the impact on your credit score will be four times. Also, the impact of hard inquiries can remain on your credit report for around two years.

So, simultaneous or frequent hard enquiries can negatively impact your credit score if you don’t get the desired loan or credit card. While, if you get the new credit after a few hard enquiries, the positive impact of the overall credit score increase may outweigh the negative impact of the enquiries within a few months. So, if you have a poor credit score and want to improve it, remember that you should apply for new credit only when you truly need it. Also, you should check your credit report regularly that all the pulls are legitimate and made after your consent.

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Debt Settlement

When an individual is unable to repay the total outstanding amount, the lender allows a Debt Settlement where he or she can pay an amount lesser than the original outstanding amount. It reflects in the credit report as ‘Debt Settled’ and could be one of the reasons behind your poor credit score. So how to rectify this? But if you had to settle your debt because of some financial hardships in the past, but now you have funds with which you can make a full debt repayment, you should do it to improve your Credit Score. After making the full repayment of your outstanding debt, you will need to request your lender to rectify the ‘Settled Debt’ in your credit report. Once done, it will help improve your score.

The Closure of the Oldest Credit Card Account

Several individuals don’t know about the importance of the Length of Credit History that contributes to around 15% of your overall credit score. What people do is when they get a new credit card and have multiple cards already, they close their oldest credit card without realizing how much negative impact it would have on their scores. It could be one of the major reasons behind a poor credit score. When you close your oldest credit card account, this can affect both your credit utilization ratio and the average age of your credit history. That’s why it is always advised to not close your oldest credit card account.

If you use your card intelligently, you can improve your credit score gradually by spending well within the credit utilization ratio and paying the bills as soon as possible.

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