Have you ever taken loan from bank? Most of the people take loan for some or the other work. Some take a loan to buy a new car, while others take it to fulfill their dream of a home. If someone takes a loan for business, then many people resort to loans when a sudden calamity strikes. Later, many times it happens that knowingly or unknowingly, there is a mistake in paying the loan installments, which is also called default.
The Many Disadvantages Of Bad Credit Score
If you have ever gone to the bank in connection with the loan, then you must be well aware of the importance of credit score… and whenever there is a default on the loan, your credit score gets very bad in a jiffy. There are many disadvantages of bad credit score. The first disadvantage is that banks can refuse to give you loan. The second disadvantage is that even if you get a loan, you will have to pay more interest.
If you too have made a mistake in paying the loan installments, do not panic. Credit score is definitely bad after defaulting, but it can be improved. Let’s know how…
These 4 companies make credit score
If you do not repay the loan, the bank considers you a defaulter and its information goes to the credit bureau. Credit bureaus prepare your credit score and credit history on the basis of this information. Loan default results in a bad credit score, which reflects your bad financial standing. There are four credit information companies in the country. These include Credit Information Bureau (India) Limited (CIBIL), Experian, Equifax and Highmark. Among these CIBIL’s credit score is the most popular.
These 3 categories of credit score
Credit score is an indicator. It shows the ability to repay the loan. Credit score ranges from 300 to 900. Generally a credit score above 750 is considered good. A score between 550 and 750 is considered average, while a score below 550 is considered poor.
This is why a good credit score is important
After defaulting the loan, when you apply for the loan again, banks ask for your credit history and score from the credit bureau. In such a situation, the information about your messed up financial credit reaches the bank. Due to bad credit score, there is a problem in getting loans and credit cards for many years. Banks can refuse to give loan. A person with a low credit score can get a loan up to 100 basis points i.e. 1 percent costlier than a person with a good credit score. Now credit score is being checked even in case of high value insurance policy and in some places jobs.
Set up auto-debit for card payments
Credit score damaged by loan default can be improved. First settle the default loan by talking to the bank. Loan settlement also has an impact on the credit score. Make timely payment of other loans or credit cards. If you forget to make the payment, you can set up auto-debit. Try to reduce your outstanding debt gradually.
Don’t overuse credit card
In case of credit cards, the credit utilization ratio should not be more than 30 per cent. If the credit limit is Rs 2 lakh, it is okay to use up to Rs 60,000. High utilization of credit limit shows that you are using most of your earnings to repay the loan, which has a bad effect.
it can take a long time to heal
Avoid applying for loans repeatedly in a short period of time, as this is considered as hard enquiry. It shows your appetite for debt i.e. Hungry Behavior, which affects the credit score. Unsecured loans such as personal loans should not dominate your loan portfolio. You should check your credit score regularly so that mistakes can be rectified. There is no fixed time for when the credit score will be perfect. Generally it may take at least 4 to 12 months.
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