How To Improve CIBIL Score After A Payment Default?_banner

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How to Improve Your CIBIL Score After Payment Default_WC

4 min 29 Mar 2023
Highlights:
  • Tips to Improve the CIBIL Score After Default

Loan default is when a borrower fails to repay the loan amount as per the initial agreement. Missing a single EMI payment isn’t defaulting on a loan. However, missing several EMIs in a row or consecutively for weeks and months is known as loan default. When you miss a single EMI, your lender won’t act immediately. Instead, they will grant you a delinquency period. Borrowers can use this delinquency period to clear the EMI and get on track regarding repayment.

Borrowers should pay the EMIs diligently as defaulting on a loan may impact your credit score negatively. A loan default reduces a borrower’s credit score by a substantial margin, which in turn, reduces one’s chances of loan approval as well as securing a loan on beneficial terms and conditions. In the case of a secured loan, such as a Home Loan or a Loan Against Property, the borrower can sell the pledged asset for loan recovery. 

If you have defaulted on a loan, your credit score will diminish substantially. This, in turn, will reduce your chances of loan approval in future. Therefore, borrowers must go the extra mile to improve their credit or CIBIL score after they have defaulted on a loan. Read on to know how to improve your CIBIL score after default.

Tips to Improve the CIBIL Score After Default

Before we discuss this topic in detail, let us look at what happens when a borrower defaults on a loan. If you have taken a secured loan, your lender will retrieve the security for loan recovery. When this happens, a recap appears on a person’s credit report. If the lender and borrower reach an agreement and the lender decides to settle the debt by taking an amount less than the amount owed, the account and debt are considered settled. However, settled debts also have a negative impact on a borrower’s credit score.

Let us now understand how to improve your CIBIL score after a loan default. Here are 5 simple tips that will help.

Keep Your Repayment History Clean

To start with, get into the habit of borrowing credit only when absolutely necessary. Take credit after proper planning, borrow what you can easily repay and once your EMIs start, make sure to clear EMIs on time. Your repayment history makes up 35% of your credit history and therefore, you should try and keep it as clean as possible.

Maintain a Low Credit Utilisation Ratio

Yet another habit that borrowers should develop is clearing the entire amount due on one’s credit card. Most borrowers keep clearing only the minimum amount due and this leads to a high credit utilisation ratio. A high credit utilisation ratio not only reduces your CIBIL score but may indicate that you rely heavily on credit. 

Also Read: What is Credit Utilisation Ratio and How Can You Improve It? 

Maintain a Healthy Mix of Credit

Borrowers trying to improve their CIBIL score after loan default must also maintain a healthy mix of different types of credits. Borrowers should have both secured and unsecured loans as this convinces lenders of a borrower’s ability to repay all kinds of loans.

Also Read: Credit Mix: Different Types of Credit that Boost Your Credit Score 

Steer Clear of New Credit

If a borrower’s CIBIL score has decreased due to a loan default, they should try their best to stay away from applying for new credit. Every time a borrower applies for a loan, their lender carries out an enquiry. This enquiry gets registered as a hard enquiry. Too many hard enquiries hamper a person’s credit score. Therefore, borrowers must steer clear of new credit, especially after a loan default when their CIBIL score is already low.

Check Your Credit Report from Time to Time

Those working on their CIBIL score must check their credit report from time to time. This helps in two ways. First, when you check your credit report after every few months, you get an idea of whether all the efforts you are making are helping you make any progress or not. Second, sometimes errors creep into a person’s credit report and cause the CIBIL score to go down. Thus, borrowers should check their credit report for errors from time to time and make sure their CIBIL score isn’t going down due to an error or mistake in reporting from the lender’s side.

We get asked often: how long does it take for credit scores to improve? The answer is that if you want to improve your CIBIL score, you need to wait for at least 6 to 8 months. Improving credit scores takes time. So, practice rigorous financial discipline for at least 6 months to see an improvement in your CIBIL score. 

How long does it take to improve credit score?_FAQs_WC

FAQs

It is a misconception that the CIBIL score can be increased within a month or two. Improving the CIBIL score takes at least 6 to 8 months. Practising healthy financial habits can help you improve your credit score.

No, the loan default history stays on a borrower’s credit report for 6 years and hence cannot be removed. However, in case it has appeared on the report by mistake, the borrower can write to the concerned credit information bureau and request them to fix the error.

Improving credit scores takes time. The minimum time you should give to this task is 6 months. During this time, pay your EMIs and credit card bills on time, limit new credit applications, lower your debt-to-income ratio, maintain a low credit utilisation ratio, and have a healthy mix of credit to improve your credit score.

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DISCLAIMER:

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