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 must try their best to not default on a loan as defaulting on a loan has several dire consequences. To start with, 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. The question is how to improve CIBIL score after default.
Tips on How to Improve 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 had 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 loan default. Here are 8 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 Utilization Ratio
Yet another habit that borrowers must 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 utilization ratio. A high credit utilization ratio not only reduces one’s CIBIL score but is also a sign of a credit-hungry and irresponsible credit user.
Also Read: What is Credit Utilization 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 gone down due to a loan default, they must try their best to stay away from applying for new credit. Every time a borrower applies for a loan, their lender sends an enquiry on them. This enquiry gets registered as a hard enquiry. Too many hard enquiries ruin 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 must 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.
Stay Calm and Be Patient
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 must be patient for at least 6 to 8 months. Improving credit scores takes time. So, practice rigorous financial discipline for at least 6 months without expecting results. Be patient and your efforts will bear fruits.
FAQs
A lot of people think that paying their credit card due on time for a month or two will enhance their CIBIL score. This is a misconception. Improving the CIBIL score takes time. Borrowers must be prepared to give at least 6 to 8 months to this task. Do not expect overnight results or you will be disappointed.
Loan default is a serious issue and borrowers must know that loan default history stays on a borrower’s credit report for 6 years. There is no way to get it removed until of course it has appeared on the report by mistake, in which case the borrower can write to the concerned credit information bureau and request them to fix the error.
Yet again, improving credit scores takes time. The minimum time you must 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, and maintain a low credit utilization ratio and a healthy mix of credit and your credit score will move up. However, as stated before, do not expect to see results in just a few weeks. Stay at it for at least 6 months.
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