Looking for a loan? Rebuild credit score to regain access of any sort

Clearing off past dues, and then taking small loans and repaying them on time will help past defaulters gradually improve their credit scores

A large number of millennials today have poor credit scores due to which they no longer enjoy access to credit of any sort. This turning off of the credit tap becomes an impediment, preventing them from achieving their goals. Millennials need to recognise the dire strait they are in and then start taking steps to gradually repair their credit score.

Mismanaged credit  

The  first factor that led to millennials spoiling their credit score was lack of awareness. The millennials were the first generation in India that got exposed to consumer lending from banks. From early 2000, banks began to build their retail-lending books, which grew steadily over the decade. However, due to lack of awareness about how these credit facilities were to be managed, many borrowers defaulted on the both repayment and terms of agreement. While products like home loans performed well, unsecured products like personal loans saw high delinquency rates.

Credit cards were a new product that this generation was exposed to. Many of them did not understand the nuances of this otherwise fantastic product. The lack of awareness about prudent utilisation led to high charges on these cards. This in turn resulted in cardholders opting to revolve credit. While revolving credit led to millennials maxing out on the available credit limits, unawareness also led to other issues with repayment. Due dates were missed and payments were made after those dates had passed. When card companies levied late fees and high interest charges, cardholders demanded reversal. And when charges were not reversed, they did not pay their dues. Sometimes they blamed non-receipt of card statement for non-payment of dues. Basically, it was their lack of awareness about how to manage credit card dues that marred their credit profiles.

Over exposure was another issue. In the absence of credit bureaus and banks’ high focus on acquiring customers, credit became too easily available. This led to individuals taking on more credit than they could repay. This was a clear cut recipe for defaults. This is exactly what happened when the global economy faced a downturn in 2008. Businesses crashed, people lost their jobs, and found it hard to meet their loan obligations. 

The millennials were also the  first generation to experience the growth of consumerism. As the economy opened up, the markets got swamped with new products. Right from new brands of cars to mobiles and electronics, millennials found it easy to acquire products with the help of credit. 

A large section belonging  to this age group also invested loan proceeds into investment products like stocks. They assumed that they would be able to create wealth from these investments while paying up the loan from their current earnings. However, with the economy taking a nosedive, their investments went bust and many suffered heavy losses. This, too, led to high default rates among millennials.

Finally, due to lack of awareness millennials ‘settled’ their accounts with banks. This essentially means that the lender agreed to accept only a portion of the total amount due and wrote off the rest. The millennials think they have cleared their dues. But the fact is that such settlements have a negative impact on a person’s credit score. To wipe the  slate clean, borrowers need to pay off their entire dues. 

Loss of access to credit hurts

Though the first credit bureau was established in 2002, it was quite ineffective till the Credit Information Act was passed in 2005. The Act mandated all lending institutions to share borrowers’ data with the bureau. However, it took some time for banks and non-banking finance companies (NBFCs) to get the processes right. It was only after 2008 that proper sharing of data happened. And when the data was reported, all the erstwhile defaulters got affected. As the bureaus grew larger and more effective, millennials experienced a number of issues.

The  most important was unavailability of credit. So far credit had been available with ease, but now it became out of bounds. Availability of credit has become almost a necessity today for a person to achieve his financial objectives. An impaired credit profile blocks access to loans and other credit instruments. Even if a person is able to survive otherwise in his day-to-day life, loss of access to credit hits him hard in case of an exigency.

Even if a lender agrees to extend a loan to a person with a poor credit profile, he will demand a higher rate of interest and other charges. In the lending business, higher the risk, higher is the rate of interest and charges. Since an individual with a poor credit profile is viewed as a potentially risky customer, a high rate of interest becomes inevitable. 

Rebuilding credit score  

A person who wishes to improve his credit score and regain access to mainstream credit must take a series of steps. The  first is to pay up the defaulted amount. He should pay up the entire outstanding amount. This will include not just the outstanding principal but also interest and other charges. Only once the entire amount due has been paid can a person expect an improvement in his credit score. 

Update records of all bureaus: Once the dues of a bank have been paid off and the  account has been closed, this information must be updated with the bureaus as well. Owing to gaps in the system, achieving this may require persistent effort. If the fact that you have repaid your creditor is not reflected in the records of credit bureaus, you will continue to face difficulty in getting access to credit products. Bear in mind that the closed status needs to be updated with all the four bureaus in India. 

Open new lines of credit: To rebuild his credit profile, the borrower will need to take fresh lines of credit, which could include loans and credit cards. If no bank is willing to offer such a customer a credit card, he should apply for a secured credit card. Another option is to take small ticket personal loans. He can thus kick start his otherwise stalled credit exposure. Taking the right mix of secured and unsecured credit (instead of binging on unsecured credit alone) is an important part of rebuilding one’s credit score. 

Build a good repayment history: Finally, while trying to rebuild his  credit profile, the  borrower must ensure that he pays all his dues on time and there is no default. Even a day’s delay will hurt his objective. He should put the required money in his bank account at least two-three days ahead of his EMI payment date. Credit card dues should also be paid off a few days before the last date of payment. 

The writer is co-founder, Credit Sudhaar