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How To Build Good Credit Score and Clean Up Bad Credit

Fixing a bad credit is just like losing weight. While it's always easy to put on weight, shading off those extra pounds always requires time. There's no shortcut to it. In the same way, quick-fix strategies to repair a bad credit history and build good credit will nothing but backfire. The thumb rule is to stay away from those tip-offs and self-proclaimed experts who assure you to improve your credit report fast. If you're still wondering how to build good credit and clean up bad credit then this post can be of great use for. Do have a read!

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1. Build your Credit Score

2. Reduce your Current Borrowing / EMI Costs

What is a good credit score?

Before we delve into how to build good credit, let’s first understand what is a good credit score. The credit score in India usually ranges between 300 and 900. The closer your score is to 900, the more you are considered as an ideal candidate by the bank for having the ability to pay off the debts. Hence, the better chances are there to have your applications being approved. Any number above 750 is considered a good credit score. In India, banks/NBFCs usually determine your credit score before advancing a loan.

How to build good credit

The best way to build good credit is to manage it responsibly over time. The following suggestions can help you take a smarter approach to cleaning up the bad credit.

3 ways to build good credit score


                        #1 Create your credit report
                        This is the first step in building a good credit score. This credit report will consist of the information you have provided to calculate your credit score. You need to now make sure if there are any late payments mentioned incorrectly or any other error. You'll also have to check on if the amounts owed to each of your open accounts is correctly mentioned. If at all you find any error then you need to notify and fix it with the credit bureau.
                        Here’s the checklist to see before you build good credit - 
                        •   Is your personal information correctly mentioned such as your name? Did you actually live in the places mentioned in the report as your current and previous communication addresses?
                        •   Are all the accounts listed actually yours? Do the credit cards showing up on your report belong to you? Did anybody else avail any kind of loan under your name ever?
                        •   Is the information provided in the report accurate? For instance, there's a late payment mentioned on an account as an error. 
                        •   Are the credit limits right?
                        •   Is any information missing? For instance, any closed account listed as open. 
                        •   Do all the data mentioned in the report supposed to be listed? Stale data in your report should be removed.
                        Creating credit report is easy and cost-effective as well. The credit report can be availed for free. 
                        Tip: If the bank denies you a loan, insurance or anything else determining your credit report then you can always demand a free report for the same. The only condition is that you must raise your request within 2 months from the time you're notified of the adverse decision by the bank.
                        #2 Automate the payment option
                        This is the second and one of the most crucial steps in building your credit scores. Making payments on time is the smartest way of maintaining an ideal credit history. While most of the banks send you payment reminders through SMS and emails, you can set up an automatic payment option through your credit card. This will ensure automatic deduction from your account on time and eliminate the fuss of fine pertaining to late payments. 
                        #3 Reduce the amount of debt
                        While this is easier said than done, it can actually help reduce your financial burden and build good a credit score. The first thing you can do is deactivate your credit cards. Create a list of all of your accounts and then check recent statements online to determine how much amount you owe on each party and what interest rate they are charging you. Now create a payment plan that consolidates your budget for debt payments. Make sure you're paying the account with the highest interest while maintaining minimum payments on your other accounts.
  1. Create your credit report

    Get Credit Report free

    This is the first step in building a good credit score. This credit report will consist of the information you have provided to calculate your credit score. You need to now make sure if there are any late payments mentioned incorrectly or any other error. You'll also have to check on if the amounts owed to each of your open accounts is correctly mentioned. If at all you find any error then you need to notify and fix it with the credit bureau.

    Here’s the checklist to see before you build good credit -

    • Is your personal information correctly mentioned such as your name? Did you actually live in the places mentioned in the report as your current and previous communication addresses?
    • Are all the accounts listed actually yours? Do the credit cards showing up on your report belong to you? Did anybody else avail any kind of loan under your name ever?
    • Is the information provided in the report accurate? For instance, there's a late payment mentioned on an account as an error.
    • Are the credit limits right?
    • Is any information missing? For instance, any closed account listed as open.
    • Do all the data mentioned in the report supposed to be listed? Stale data in your report should be removed.

    Creating credit report is easy and cost-effective as well. The credit report can be availed for free.

    Tip: If the bank denies you a loan, insurance or anything else determining your credit report then you can always demand a free report for the same. The only condition is that you must raise your request within 2 months from the time you're notified of the adverse decision by the bank.

  2. Automate the payment option

    This is the second and one of the most crucial steps in building your credit scores. Making payments on time is the smartest way of maintaining an ideal credit history. While most of the banks send you payment reminders through SMS and emails, you can set up an automatic payment option through your credit card. This will ensure automatic deduction from your account on time and eliminate the fuss of fine pertaining to late payments.

  3. Reduce the amount of debt

    While this is easier said than done, it can actually help reduce your financial burden and build good a credit score. The first thing you can do is deactivate your credit cards. Create a list of all of your accounts and then check recent statements online to determine how much amount you owe on each party and what interest rate they are charging you. Now create a payment plan that consolidates your budget for debt payments. Make sure you're paying the account with the highest interest while maintaining minimum payments on your other accounts.

What is Bad Credit?

In India, where credit score is determined between 300 and 900, any score below 750 is considered as a bad credit score. Bad credit is referred to the past record of the defaulters, who’ve failed to keep up with their timely payments. Hence, these applicants usually dont qualify to avail any new credit or loan.

It typically means the applicant hasn’t paid the due credit on time, or haven't paid them at all. The credit report of such applicants also takes into account public records such as any Govt. or federal tax liens, legal disputes against them and bankruptcies to name a few. Let's now have a look at the factors that lead credit bureaus like Equifax India to determine your credit score as bad.

How to clean bad credit

5 Factors that determine your credit score as bad and how you can clean it up

#1 Not paying debts on time and EMIs getting bounced off 
                        The credit score usually comprises of 30-35% of your total loan amount and credit card bills. Any kind of default in credit payment or EMI bounce offs will only lead to point deductions from your current credit score. The size of your card bill, outstanding loan amount and number of late payments determine the exact deduction of points from your credit score. 
                        Moreover, the late payment history will continue to be featured on your credit report for a few years, subsequently hampering you from building a good credit score. Hence, it becomes very important that you make your payments on time and maintain your credit score report as good as possible.
                        #2 High Credit Card Utilisation Ratio
                        Also known as credit utilization rate, it is the amount of credit you're presently using divided by the total amount of revolving credit available. To simplify, it is the amount you currently owe divided by your credit limit. 
                        Your high credit card utilisation rate defines your average credit card balances against your credit card limit. Although frequent use of credit card does not lead to low credit score, an excessive use of your credit limit will create an impression that you're mostly dependent on credit and that you are not able to manage your finances responsibly. 
                        Ideally, your credit card usage should not exceed 40% of your total credit card limit. For instance, if your credit limit is 60,000 INR and you're planning to purchase anything worth 30,000 INR, your credit card utilization rate will increase up to 50%. So, you should always put a check on your credit card usage.
                        #3 Availing too many unsecured loans
                        Unsecured loans such as personal loans and credit cards are mostly availed to fullfill personal requirements. Unlike secured loans, unsecured loans come with higher interest rates. Having applied for too many of them reflects poorly on your credit report, thus leading to a bad credit score. So, try to avoid availing unsecured loans as much as you can. 
                        #4 Too much of credit enquiries
                        Every time you approach to apply for a loan or credit card, your request gets recorded. And those enquiries then show up on your credit report. Too much of credit enquiries often create a negative impression, thereby leading to point deduction from your credit score.
                        #5 Looking for settlement options instead of paying off debts
                        The borrowers who fail to pay off their debts are often provoked to settle down their outstanding amount through a one-time settlement with the creditor. While the borrowers settle down the payment with a steep discount, the lender anyway reports that settlement to the credit bureaus. Subsequently, this settlement gets highlighted on the credit report under a “settled” tag. This kind of tag severely impacts the applicants’ credit score. They are hence considered as a credit risk because of the borrowers’ failure to repay the previous debts.
  1. Not paying debts on time and EMIs getting bounced off

    The credit score usually comprises of 30-35% of your total loan amount and credit card bills. Any kind of default in credit payment or EMI bounce offs will only lead to point deductions from your current credit score. The size of your card bill, outstanding loan amount and number of late payments determine the exact deduction of points from your credit score.

    Moreover, the late payment history will continue to be featured on your credit report for a few years, subsequently hampering you from building a good credit score. Hence, it becomes very important that you make your payments on time and maintain your credit score report as good as possible.

  2. High Credit Card Utilisation Ratio

    Also known as credit utilization rate, it is the amount of credit you're presently using divided by the total amount of revolving credit available. To simplify, it is the amount you currently owe divided by your credit limit.

    Your high credit card utilisation rate defines your average credit card balances against your credit card limit. Although frequent use of credit card does not lead to low credit score, an excessive use of your credit limit will create an impression that you're mostly dependent on credit and that you are not able to manage your finances responsibly.

    Ideally, your credit card usage should not exceed 40% of your total credit card limit. For instance, if your credit limit is 60,000 INR and you're planning to purchase anything worth 30,000 INR, your credit card utilization rate will increase up to 50%. So, you should always put a check on your credit card usage.

  3. Availing too many unsecured loans

    Unsecured loans such as personal loans and credit cards are mostly availed to fullfill personal requirements. Unlike secured loans, unsecured loans come with higher interest rates. Having applied for too many of them reflects poorly on your credit report, thus leading to a bad credit score. So, try to avoid availing unsecured loans as much as you can.

  4. Too much of credit enquiries

    Every time you approach to apply for a loan or credit card, your request gets recorded. And those enquiries then show up on your credit report. Too much of credit enquiries often create a negative impression, thereby leading to point deduction from your credit score.

  5. Looking for settlement options instead of paying off debts

    The borrowers who fail to pay off their debts are often provoked to settle down their outstanding amount through a one-time settlement with the creditor. While the borrowers settle down the payment with a steep discount, the lender anyway reports that settlement to the credit bureaus. Subsequently, this settlement gets highlighted on the credit report under a “settled” tag. This kind of tag severely impacts the applicants’ credit score. They are hence considered as a credit risk because of the borrowers’ failure to repay the previous debts.

To summarize..

As we had already mentioned, credit repair is time-consuming. The process to build good credit will require time. The above tips help you know your rights and exercise them to obtain impressive results. If you are still seeking for professional help then there are a few reputable firms who can help you. Regardless of how you plan to build a good credit score and clean your bad credit history, we encourage you to go for it. You don't have to lose anything. Don't you?!!

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