Bad credit is something that may just creep into your life without a warning akin to any other unwanted situation. In the unfortunate event of the financial crisis that may arise for any reason, pink slip in the job, business losses, medical or any other exigency, the repayment of all the dues go for a toss. This leads to the credit profile getting impacted severely.
Once the person is able to come out of the difficult situation on the financial front, closes the delinquent accounts by repaying the loan outstanding he may still suffer from the inaccessibility of credit. In such a situation what should one be doing? Should one be looking out for bad credit personal loans which may turn out to be highly expensive and in some situations even such private funding may be out of bound?
There are options that one can explore to work on his credit profile and regain the status that would allow him to have loans from regular lending institutions. And credit cards are the best way to kick start the halted credit cycle. But before we explore the option available on cards, let us first understand how the credit score gets calculated.
Your credit score is an outcome of 5 broad parameters viz. Repayment pattern, the amount owed to various lenders, length of credit, a mix of credit, and new accounts. Since all first four parameters remain challenged the option is to get to start a new tradeline. The fact also remains that despite having paid the past dues the access to loans may not be possible. In such a situation, credit cards come handy and can help in rebuilding the credit profile. The first step towards it will be applied for a secured credit card. These are the secured credit cards that are issued against the fixed deposit put in by you with the bank. One can acquire such a card by putting in a fixed deposit of as low as Rs 20,000. The banks generally issue a card with a limit of up to 80% of the deposit amount. It means that you would be able to enjoy a credit limit of Rs 16,000 on the credit card.
Following should be the strategy that one should apply:
More v/s one card Now people may be of the opinion of taking one credit card against a large deposit. This would while have them manage their finances a notch better, it is advised to have multiple cards. If funds permit then one should go in for 3 credit cards against 1. This will help in building the credit profile in a better way.
Correct usage One must not use the card beyond a certain percentage of the prescribed credit limit. It is advised to restrict the usage to up to 30% of the limit. One can use it for small-time expenses like filling petrol, buying groceries, payment of utility bills, etc. Any large ticket transaction on these cards is to be avoided completely.
Repayment against the dues Just like any other regular credit card, a monthly bill shall be received by you with a repayment date. You go to ensure that the payment is being made on or before the due date without fail. Failing to pay the amount on the due date can again lead to complicating the credit recoup process. The payment should not get delayed even by a day. In fact, it would be advisable to go in for a standing instruction to pay the dues to avoid getting into a delayed payment situation. Also, it is advisable to repay the amount in full.
While this may not have a direct impact on your credit score but definitely has a direct implication on your finances. So go ahead and build your credit once again through credit cards.