By Vineet Kumar Steps to Improve Your Credit Score After a Default
A loan or credit default might feel like a major financial roadblock, but it’s not the end of the road. With some focused effort, you can rebuild your credit score and regain financial stability. Here’s a guide to help you bounce back, along with relatable examples to make things clearer.
Understanding Credit Score Basics
Before diving into the steps, let’s quickly recap what a credit score is and why it matters.
A credit score is a three-digit number that represents your creditworthiness. It plays a crucial role in determining your eligibility for loans or credit cards. Banks and lenders use this score to decide how much risk they’re taking in lending to you.
Who assigns credit scores? In India, credit bureaus like TransUnion CIBIL, Experian, Equifax, and CRIF High Mark issue credit scores based on your borrowing and repayment history.
Range of scores:
300–550: Poor – You’ll struggle to get loans.
551–700: Fair – Improvements needed for better deals.
701–759: Good – You’ll likely get decent offers.
760+: Excellent – You’re a lender’s dream!
For instance, if Anjali has a score of 785, she can expect better interest rates on her home loan compared to Rohan, whose score is 620.
How Does a Loan Default Impact Your Credit Score?
When you miss a payment for more than 90 days, it’s marked as a default. This stays on your credit report for seven years and drags your score down significantly. For example, if your EMI for a personal loan isn’t paid due to job loss, lenders will see you as a high-risk borrower.
But don’t worry – there’s a way forward!
Steps to Improve Your Credit Score After a Default
1. Clear Your Outstanding Dues
The first step is to settle your debts. Contact your lender, explain your situation, and negotiate a repayment plan. Once you clear your dues, the status on your loan changes from “default” to “closed.”
Example:
Rahul missed his credit card payments during the pandemic. He approached his bank, agreed to a one-time settlement, and paid off the dues. His credit report now shows “closed” instead of “default,” which is a positive sign.
2. Get a No Objection Certificate (NOC)
After repaying your dues, request a No Objection Certificate (NOC) from your lender. This is proof that you’ve cleared your obligations.
Tip: Always double-check that the updated status reflects in your credit report.
3. Regularly Monitor Your Credit Report
Mistakes on your credit report can hurt your score. Check for inaccuracies or duplicate entries, and if you spot any, raise a dispute with the credit bureau.
Example:
Meera found an unpaid loan listed in her report, but she had already paid it off two years ago. She submitted proof to the credit bureau, and the error was corrected, improving her score.
4. Make Timely Payments
Consistency is key. Pay your credit card bills and EMIs on time every month. Even small delays can impact your score.
Pro Tip: Set up automatic payments or reminders to ensure you never miss a due date.
5. Lower Your Credit Utilization Ratio
This ratio reflects how much of your available credit you’re using. Experts recommend keeping it below 30%.
Example:
If Priya has a credit card limit of ₹1,00,000 and regularly uses ₹90,000, her credit utilization ratio is 90%, which is too high. By reducing her spending to ₹30,000, she can improve her score.
6. Avoid Multiple Credit Applications
When you apply for too many loans or credit cards in a short time, it signals financial distress to lenders.
Solution: Focus on stabilizing your finances first. Once your score improves, you can apply for credit.
7. Rebuild with Smaller Loans or Secured Credit Cards
Start with manageable credit products like secured credit cards or small loans. Use them responsibly to show lenders that you’re back on track.
Example:
After defaulting on a car loan, Arjun applied for a secured credit card with a fixed deposit as collateral. By using it wisely and paying on time, he slowly rebuilt his credit score.
Conclusion
A loan default might seem overwhelming, but it’s not a permanent mark on your financial life. By clearing dues, adopting responsible credit habits, and monitoring your credit report, you can regain control and improve your score over time.
Financial discipline and patience are your best allies on this journey. Remember, a brighter financial future is just a few steps away!
