Credit Rehabilitation Strategies
A credit score or CIBIL score enables lending institutions to read the credit history and financial habits of every applicant. This three-digit numeral indicates if s/he is capable of managing long-term financial commitments such as a loan, helping lenders assess whether to sanction or reject the loan application.
The significance of a strong credit score cannot be stressed enough as it is one of the foremost factors that lenders will evaluate for eligibility and credit profile checks when reviewing loan requests. Hence, it is absolutely essential that you remain on top of things and take every effort to maintain a good CIBIL score. However, if you find your credit score dropping for some reason, you may augment it by implementing remedial measures referred to as credit restoration or credit rehabilitation.
What is Credit Rehabilitation?
Credit rehabilitation is a way to repair your credit history and improve your credit score. Credit rating is based on multiple variables and altering debt management strategies can make it right.
Credit score is basically a numeric summary of your past credit activity. Therefore, you should first understand why you have a bad credit rating and what constitutes your overall credit score. Normally, improving the parameters listed below can turn your score around:
- Payment history
- Credit utilisation ratio
- Credit history duration
- New accounts
- Credit mix
Why is Credit Rehabilitation Important?
Credit bureaus calculate credit scores based on information collected from various banks and finance companies. In India, the scoring pattern ranges between 300 to 900. A credit score closer to 900 is considered ideal for availing any form of credit at the best possible interest rates and terms.
Most lenders accept 750 and higher as the right credit score range. Conversely, a lower score may make it harder to secure favourable deals with the possibility of facing loan denial. This is why, individuals and companies who wish to take up loans or other lines of credit must possess healthy credit scores to receive quicker loan approvals. If you have a sound credit record, you can further negotiate suitable terms and conditions with your lender.
However, in case of a less-than-ideal score, you may opt for credit rehabilitation strategies to raise your credit profile in order to benefit from the most competitive interest rates available in the market.
Steps for Credit Restoration
Here are some smart tips that can help in enhancing your credit score:
1. Understand Your Credit Report
This is the first step in the process. Once you receive your credit report, you should know how to read and make sense of the contents so as to gauge where you currently stand. There are four credit rating agencies in India, namely TransUnion CIBIL, Experian, CRIF Highmark and Equifax; and individuals are entitled to one complete credit report from each bureau free of cost in a year. If required, you can get all four reports and analyse them to find the right solution.
2. Rectify Errors in Credit Reports
Credit reports may contain mistakes and inconsistencies such as duplicate lines or missing payments which could potentially affect your credit score. So if you come across such errors, be sure to contact the respective bureau and get them rectified. It usually takes about 30 days to fix these issues and then update the report.
3. Revisit Your Debt Management Plan
Planning your debt repayments effectively is crucial to a trouble-free loan journey. Hence, revisit your finances and loan schedule. Note down your expenses on an Excel sheet and verify where the budgeting may be amiss. Once you identify the problem, take determined steps to pull back on expenditures making timely bill payments your topmost priority.
4. Stick to the Budget
Now that you have tweaked your budget, make sure that you stick to it. Curtail unwanted expenses and use a mobile app to set reminders for bills and EMIs so that you do not miss any of the payments. Continue paying monthly instalments before the due date to generate a favourable credit history and maintain your CIBIL score.
5. Repay High-Interest Debts
When you have surplus money in the form of a bonus or an incentive, use it to prepay any of your high-interest debts, either fully or partially. Doing so will enable you to close your loans faster and/or free up the credit limit on your credit card. This can greatly aid in enhancing the credit utilisation ratio and your own credit score.
6. Avoid Applying for New Credit
Every time you apply for a new loan or credit card, it will be mentioned on your credit report as a hard inquiry. One hard inquiry doesn’t hurt your credit score but several of them may harm it. Thus, if you are denied a loan application, it is advisable not to apply with multiple lenders. Instead, find out the reason for loan rejection and work on it before you apply again.
Credit Restoration Services from Professionals
Repairing your failing credit involves understanding the basic factors that can affect your credit report. If the pointers enumerated here appear difficult, you may take the help of a professional consultant or company, who can offer practical suggestions based on your specific circumstance and financial standing. Professional services normally offer assistance in the following ways:
- Discussion with lenders – The company will explore possible solutions with the lending institution on your behalf while keeping you in the loop at each stage of the resolution process.
- Get the best repayment terms – They will always try to negotiate with the lender to get you the best repayment terms that match your requirement and monetary condition.
- Tailor-made EMI options – You may expect attractive and customised EMI options from the lender which will make the loan repayments easier.
- Updated credit scores – The consultants will make sure that your negative accounts have a clean closure. At the same time, they will also follow up with the concerned bureau to update your credit score.
Repairing credit is a slow and continuous process. Whether you opt for credit rehabilitation by yourself or take the aid of a professional, the procedure is likely to take six months to a year before you notice any improvement. Until then you need to diligently exercise financial discipline and keep track of your credit report.
Credit score is integral to the credit application process and must never be treated lightly if you intend to avail of a loan or other forms of credit at a future date. In this respect, building and maintaining a good CIBIL score is a welcome start to strengthening your credit profile and economic health. Apart from that, prudent money management remains the key to handling regular cash flows whilst ensuring that you also plan your debts within the scheduled repayment framework to maximise the credit benefits.
