What is bad credit score: Factors that affect credit score, and how it can be improved?

Credit scores show whether an individual can manage their finances well or not. A healthy credit score is essential for financial well-being as it reflects one's responsible financial behaviour and enhances their chances of obtaining loans and credit cards at favorable terms. In India, credit score is calculated by credit bureaus like Credit Information Bureau India Limited — popularly known as CIBIL, Equifax, and Experian. Individuals can follow these steps to improve their credit score in case it goes bad — 

Credit score: Factors that affect credit score 

An individual's credit score is typically based on factors like — 

1) Payment history: The regularity or irregularity of paying bills is the most crucial factor that affects an individual's credit score. Consistently paying credit card bills and loan EMIs on time demonstrates a borrower's reliability and boosts their credit score.

2) Credit utilisation: The proportion of the available credit that is being used is another significant factor that affects credit score of a person. High credit utilisation shows that a person is credit-hungry. Hence, keeping credit utilisation below 30 per cent is advisable.

3) Length of credit history: Longer credit history is a sign of trustworthiness and deemed more favorable, as it provides a better picture of one's financial behaviour.

4) Types of credit: Having a mix of credit types — credit cards and loans — can also positively impact credit score.

5) New Credit: Opening of multiple new credit accounts in a short span is also perceived as risky behavior.

How to improve CIBIL or bad credit score

1) Review your credit report: One can obtain free copy of their credit report from all major credit bureaus. One must check for errors, such as incorrect payment information or accounts that don't belong to them and dispute any inaccuracies.

2) Pay bills on time: Timely payments are crucial. One must set up reminders or automatic payments to ensure they don't miss due dates.

3) Reduce debt: A borrower must focus on repaying high-interest debts first. It helps to create a debt repayment plan which can help manage outstanding balances effectively.

4) Credit utilisation: One must aim to keep credit card balances well below the limits. High credit card balances relative to credit limit can negatively impact one's credit score.

5) Avoid opening too many new accounts: While having a mix of credit types is beneficial, opening too many new accounts within a short period can lower the average account age and impact one's credit score.

6) Negotiate with creditors: One can negotiate with creditors and banks for lower interest rates or a more manageable payment plan in case they're facing a cash crunch or shortage of funds.

7) Secured credit cards: In order to fix low credit score, one can also obtain a secured credit card. These credit cards require a security deposit and are designed for individuals with poor or no credit history.

8) Don't close old accounts: Closing old accounts can shorten one's credit history, affecting their credit score. One must look to keep old accounts open, even if they're not used regularly.

What is a bad credit score?

As per banking services provider Paisabazaar.com, a CIBIL score under 650 is likely to affect one's credit and loan applications. It states that a CIBIL score above 750 is considered 'excellent', and a score between 701 and 749 is considered 'good'. Any credit score between 621 and 700 is considered 'fair' and anything below 620 is considered 'poor'.