Top 5 financial steps to bounce back from a low credit score - Expert's guide

Credit score is one of the first filters factored in by the lenders while evaluating loan and credit card applications. Some lenders even factor in your credit score for setting lending rates of loans. A low credit score is considered as sign of indiscipline in credit behaviour, those having lower credit score have lower chances of availing loans and credit cards or are charged higher interest rate for loans sanctioned to them. In this article, Radhika Binani, Chief Product Officer, Paisabazaar.com, explains 5 financial tips to enable you to improve your credit score.

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1- 'Restrict your credit utilization ratio within 30%'

Radhika Binani, says, "Credit utilization ratio (CUR) refers to the proportion of the total credit card limit utilized by you. As lenders usually consider applicants with CUR above 30% as credit hungry, credit bureaus tend to pull down your credit score by a few points on breaching this mark. Hence, credit card users should always aim at restricting their card spends within 30% of overall credit limit. Those who tend to frequently breach the 30% mark can request their existing card issuers to increase their credit limit. Alternatively, you can opt for an additional credit card. An increased credit limit can reduce CUR, provided you do not end up increasing your credit card spends after obtaining a higher credit limit.

2- 'Refrain from submitting multiple credit applications to lenders within a short span of time'

"Whenever you apply for a loan or a credit card, the lender assess your creditworthiness by fetching your credit report from the credit bureaus. Such lender initiated credit report enquiries are considered as hard enquiries, each of which can pull down your credit score by some points. So, if you submit multiple credit enquiries especially within a short span of time, your credit score can suffer a significant dip," says Binani. "Thus, instead of directly applying for a loan or credit card with multiple lenders, visit online financial marketplaces to compare various credit card or loan offers available, based on your credit score, income and other eligible criterion and apply for the optimum one. Although these marketplaces will also fetch your credit report, such credit report requests are considered as soft enquiries by the credit bureaus and hence, they do not impact your credit score."

3- 'Ensure regular and timely repayments of loan EMIs and credit card bills'

Binani suggests, "Credit bureaus are widely believed to give maximum weightage to credit repayment history while calculating the credit score. Any form of delay or default in repaying your loans and credit card dues are included in your credit report and result in reduction of your credit score. Hence, consumers should always try their best to repay their loan and credit card by their due date."

4- 'Develop the habit of reviewing your credit report periodically'

"As credit bureaus calculate credit score primarily on the basis of the information provided by the lenders and credit card issuers, any incorrect information, clerical error or even fraudulent credit activity listed in your credit report can adversely impact your credit score. The only way to spot such inaccuracies is to periodically review your credit report, at least once every three months. In case, you find such inaccuracies, report them to the concerned credit bureau and lender/credit card issuer at the earliest for rectification. A rectified credit report will automatically sport a higher credit score," adds Binani. "You can fetch one free credit report every year from each of the four credit bureaus. Alternatively, you can visit online financial marketplaces to fetch free credit reports along with monthly updates."

5- 'Track the repayment activities of co-signed/guaranteed loan accounts'

"Co-signing or becoming guarantor to a loan makes you equally liable to ensure its timely repayment. Hence, any delay in the co-signed or guaranteed loan account’s repayment will adversely impact your credit score as well. Thus, ensure to regularly review the repayment activities in the loan co-signed or guaranteed by you. As the repayment activity of the guaranteed or co-signed loans would also reflect in your credit report, reviewing your credit report at regular intervals can help in tracking the guaranteed or co-signed loans," concludes Binani.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)