Credit cards are one of the best things that could happen to us. For most people, they are the most reliable solution to make emergency expenses. But saying that credit cards are the most harmless of all the other solutions is not entirely true. If you don’t manage your credit judiciously, you can end up in a debt trap. Even worse, you can end up with a bad credit score to the point that recovery starts looking unreal.
A bad credit score affects your creditworthiness and makes it difficult to continue borrowing, whether it’s a car loan, a credit card account, or a mortgage. People with lower credit scores also require paying higher interest rates when it comes to loans or insurance. The consequences are more problematic than you may think. Therefore, it’s important to look for a creative solution that would help with debt.
There are some effective ways you can start to recover from the damage and build your credit score back up. Read on.
1) Pay Bills on Time – Many people go for months, paying off just the minimum amount due on their credit card account without knowing how to budget for big expenses. While avoiding late payments by just paying the minimum amount looks like a tempting idea, doing so can land you in higher debt. This is because credit card companies apply a finance charge to the unpaid bill. Moreover, not being able to pay the complete bill amount can also put an end to the interest-free period on fresh transactions. Therefore, it’s important to pay off the entire bill component.
You can also opt for the EMI option for clearing credit card dues, which is available on zero or low interest. Visit your net banking portal for the same or reach out to customer care to seek help.
2) Keep Credit Utilisation Ratio in Check – The credit utilisation ratio is calculated by comparing the total credit amount available to a cardholder against the available credit. Credit card companies see accounts with maxed-out limits as red flags. Therefore, it is always good to keep your credit card utilization ratio lower. To keep it in check, make sure to:
(a) Maintain a zero or low card balance.
(b) Pay off your credit card debt.
(c) Stay cautious when you close a credit card account. Closing an account means reducing your available credit, because of which the credit utilisation score takes a hit.
3) Open a Secured Account – Opening a secured account is a smart way of rebuilding your credit score since it helps create a positive credit history. As a cardholder, you can deposit cash in your secured account as collateral and borrow a certain percentage of the amount deposited.
This is helpful for people with low credit scores who resort to using cash or debit cards for their purchases. If you have a bad credit history, instead of quitting credit cards, open a secure account, make purchases you can pay off, and payback in a timely manner. This informs the credit bureau that the cardholder handles their credit responsibly, thereby improving your credit score.
4) Use New Credit Wisely – Though applying for a new credit card improves your credit utilisation ratio, it can make things worse if you’re unable to pay monthly bills on time. Moreover, credit card applications appear as hard inquiries and each hard inquiry could pull the credit score further down by 10 points. Therefore, be extra cautious not to make too many hard inquiries in a short time.
Moreover, too many applications for new cards may appear to your creditor as if you’re barely managing to stay afloat and relying on credit to sustain further. So, make sure to first improve the credit score by paying consistently on time before applying for new cards.
5) Get Help With Debt – If you’re struggling to come out of the debt trap, seek help with debt. Options may include:
(a) Credit counselling: Talk to a certified credit counsellor who would help you chart out an efficient financial plan to manage your debt.
(b) Debt management plan: A debt management plan focuses on paying off debt by involving a third-party counsellor who pays unsecured bills on your behalf from the money you deposit each month.
(c) Debt consolidation: The debt consolidation method focuses on moving credit and debt in a way that the interest rates are reduced. This might also trim the total amount you pay each month, making paying off debt much easier.
Your credit score can hold a lot of power over your lifestyle. Therefore, it’s important to realise how necessary it is to rebuild it.
Make sure to follow the tips above; each one will help you rebuild your credit score up to a certain percentage.
Author Bio:
Aatish Khanna works with the Content Marketing team at Money Club – a digital chit fund platform that makes saving, borrowing, and investing your money more efficiently. He writes on topics to help his readers understand processes so they can make better financial decisions.
He’s the go-to person that his family, friends, and colleagues turn to for all their money matters. He loves to play board games and aspires to one day build his one finance-related board game and app.
