How Fast Does A Credit Score Go Up After Paying Off Debt?

Paying off debt can help you raise your credit score quickly. Find out how fast you can improve your credit score by making payments on your debt and other tips for how to improve your credit score.

6 Sep,2023 12:10 IST 2079 Views
How Fast Does A Credit Score Go Up After Paying Off Debt?

There are few of us today who do not use some form of credit facility or the other. Whether a running tab at the local kirana shop, a personal loan, a car loan, an educational loan or a home loan – most of us have used these at some point of time or are still dealing with their repayments. Even for those of us fortunate enough not to have need of any such credit, we still use the credit card for most of our purchases, both online and offline.

Availing credit from registered banks and financial institutions is much easier for those of us with a high credit score, especially if we are seeking a credit product without any collateral, such as personal loans and credit cards. Even if we are seeking a secure loan, a good credit score helps us avail lower interest rates.

As most of you are aware, your credit score is dependent on several factors:

  • Your Credit Repayment History
  • Your Credit Utilisation Ratio
  • The number of credit products you are using
  • Hard Enquiries
  • Length of Credit History

What is important to keep in mind is that there are four credit rating agencies authorised by the RBI to operate in India. The credit score provided by each of these bureaus may vary somewhat. This is because not all lenders report to all the bureaus. In addition, credit bureaus use algorithms to calculate your credit score based on the information provided by lenders and banks. The algorithms used by the bureaus may differ from the others.

Another important component is your repayment history. Are you paying your EMIs on time? Do you pay your entire credit bills regularly on a monthly basis, or do you frequently pay just the minimum amount due. The ratio of the number of delayed payments to the number of payments you need to make every month affects your credit score. The greater the number of delayed payments, the lower your score. Even a single delayed payment lowers your score by a few points.

In addition, your Credit Utilisation Ratio is another important factor that affects your credit score. This is the ratio of the total credit used by you to the total credit available in your name. A credit utilisation ratio of more than 30% is not looked on favourably by lenders and drives your score downwards. To explain: Suppose you have a credit limit of INR 200,000/- on all your credit cards put together. In a given credit card cycle, suppose you use INR 120,000/-. In this case, your Credit Utilisation Ratio will be 60%. This in turn negatively impacts your credit score.

All of us, whether we need to avail further credit or not, would like to maintain a good credit score. However, if our score is lowered due to some unpaid EMI, delayed payment, or a high credit utilization ratio, most of us would want to improve credit scores as soon as possible by paying off the overdue EMI or debt and keeping our credit utilisation ratio within 30%.

The question therefore arises, “How Fast does a Credit Score Go Up after Paying off Debt?” or “How to Improve Credit Scores?

Once you repay a debt or an overdue EMI, you should be prepared for a time-lag of at least 45 days or more before this is reflected on your credit report and your credit score. This is because lenders usually share reports of their clients with the credit rating bureaus on a monthly basis. Thus, suppose you have paid a debt early in the month, say on the 2nd of a given month. The lender, however, only prepares a consolidated report for the credit rating agencies for a period that extends from the 1st of the month to the last day of the month. In addition, it may take a few days to consolidate this report. Thus, the report is likely to reach the credit rating agencies almost 40 days after you have cleared the debt. In addition, the credit rating agency may take a few days to upload the data and run the algorithms to generate your credit score. Thus, any change in your credit behaviour takes time to be reflected in your credit score.

Since it does take time for debt and overdue repayments to be reflected in your credit report it is best that you avoid such situations altogether. If your payments are being delayed because you have subscribed to several different credit products and each have different dates which you find difficult to keep track of, you could consider a personal debt consolidation loan, such as those offered by IIFL. Else, you should consider keeping reminders on your phone or your calendar. Sometimes, however, your delayed payments may be due to a genuine financial crisis due to an emergency at home, a downturn in your business. In such a case you could consider borrowing from an informal source like a friend or family member. Alternatively, you could consider a personal loan or a loan against gold to tide you through.

Plan your loan well though and ensure you will be able to make the repayments as per the agreed schedule so that you do not default again. You could use a personal loan EMI calculator to help plan your EMIs. However, do your research well before approaching a lender for a loan. Compare interest rates, loan amounts, repayment tenures and shortlist three or four lenders in order of preference. Keep in mind that each time you approach a lender for a credit product, a hard enquiry is generated against your credit report by the lender, driving your score downward again.

Thus, if you are in need of a loan to help you honour some of your commitments, do check the different loan products offered by IIFL Finance. Application procedures are simple and the processing time is quick. In addition, you could complete the entire process online, without having to step into an IIFL office.

Disclaimer: The information contained in this post is for general information purposes only. IIFL Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. Given the changing nature of laws, rules and regulations, there may be delays, omissions or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Gold/ Personal/ Business) loan product specifications and information that maybe stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Gold/ Personal/ Business) loan.

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