Your credit score is more than a three-digit number that lenders use to check your loan eligibility. It’s your trump card for landing a great deal on a new loan or it could even impact your chances of securing your dream job.
As you would probably know, your credit score is a three-digit number that lenders use to evaluate your eligibility for a loan or credit card. Besides determining your eligibility, the credit score has far reaching impacts that affect various aspects of your financial standing.
Before we discuss the side effects of a bad credit score, let’s spend a few minutes understanding what is considered as a bad score.
What is a bad credit score?
Generally, credit scores fall in the range of 300 to 900. A score of 750 or above is considered as excellent.
|Credit Score Breakdown||Score Range|
|Excellent||750 and above|
|Very Good||700 – 749|
|Good||650 – 699|
|Poor||600 – 649|
If you’re curious to know where you stand, you can quickly check your latest credit score for free at CreditMantri. Just provide a few basic details and your latest score will be sent to you within a couple of minutes.
The Costs of a Bad Credit Score
You may assume that you don’t have to worry about your credit score as long as you don’t take a loan. The reality is that having a bad credit score not just impacts your borrowings, but also affects your overall personal finances.
In this post, we list out the top ways a bad credit score (and your overall credit profile) cost you.
- Rejection of Loan/Credit Card Applications
Whether you apply for a fresh loan or a credit card, the first thing that lenders check is your credit score and history. Of course, there are other factors like age, income, employment status that determine the outcome of your loan application.
However, your credit score is one of the crucial factors that decides the outcome of loan/credit card applications. Having a bad credit score puts you in an unfavourable light in front of the lender. The credit score determines your overall creditworthiness and your ability to repay the loan/bill on time.
When you have a bad score, it indicates that you’ve had trouble handling credit in the past. It places additional risk on the lender. Hence, most lenders avoid granting loans to applicants with poor credit scores.
The cost of a loan rejection has far-reaching implications. Having a loan application rejected can hamper your future growth and dreams. For example, let’s state that you’ve been granted admission at a prestigious university. But, your education loan application gets rejected due to a bad score. It has the potential to derail your education and future career.
- Higher Loan Burden
Some lenders do not sanction loans to applicants with poor credit scores. On the other hand, few lenders do not outright reject the loan application but charge high interest rates. You may find that it’s possible to avail a loan with bad credit. But, the catch here is that the terms of the loan may not work in your favour.
When lenders sanction loans to borrowers with poor credit scores, they offset the risk by charging a higher interest rate. Very often, borrowers assume that getting a loan with a high interest rate is better than a loan rejection.
But, this could prove to be extremely costly in the long run. Even a minor increase in loan interest rates can increase your overall loan burden by a huge amount. Let’s explain this with an example.
Let’s say, a lender offers a home loan of Rs. 50 lakhs for a tenure of 20 years at 7% per annum. The total amount payable in this case is Rs. 93,03,989 and the monthly EMI is Rs. 38,765. Now, consider the same home loan with the interest rate of 8.5%. This increase in interest results in the monthly EMI increasing to Rs. 43,391 and the overall loan amount increasing to Rs. 1.04 crores.
As you can see, even slight changes in loan interest rates increase the loan burden significantly. More the loan burden, the lower are your savings and bigger the stress on your finances.
- Unfavourable Loan Terms
Besides charging you higher interest on your loans, lenders may also penalise you for a bad credit score by extending unfavourable loan terms.
Here are the other ways that a bad credit score may affect you while applying for a loan/credit card:
- The lender may not offer you the loan amount you’re looking for. You may be sanctioned a lower loan amount. As a result, you will have to raise the remaining amount on your own.
- The credit limit on your credit card may not be as high as you expected.
- You may be offered a shorter loan tenure.
- The lender may ask you to provide a large down payment or offer other collateral.
- You may find that your loan application requires a guarantor or co-applicant.
All these place additional strain on your finances and impact your growth.
- It may even affect your Job Opportunities
Though not common in India yet, few employers run a background credit score check before hiring new employees. This is more relevant if you’re looking to get a job in a financial services position like a bank teller, cashier, accountant, etc.
A bad credit score shows that the applicant has difficulties managing their personal finances. Hence, prospective employers do not prefer individuals who are financially undisciplined.
- It can impact your Business Opportunities as well
If you’re an entrepreneur running your own business venture or looking to start a new venture, then your personal credit score is likely to impact your business prospects as well. When you apply for a business loan, lenders do not just evaluate your business credit score but also consider the personal credit score of the owner as well.
- Finally, It can cause Emotional Distress
A bad credit score knocks down several financial opportunities. Whether you’re planning to purchase a new car or take insurance for your family, your credit score plays a crucial role in various aspects of your daily life. Having a bad credit score leads to multiple loan rejections. You may then have to spend additional time looking for lenders who offer loans to individuals with poor credit scores. Even if sanctioned, the loan’s terms and interest rates may not be in your favour. All of this can take a toll on your emotional well-being, causing you to feel like a failure when it comes to your personal finances.
It can start impacting your personal relationships as well. Frequent loan/credit card rejections prevent you from realising your family’s dreams like a new home or a new car. All of which could lead to stress and lack of harmony at home.
Having a bad credit score not only impacts your current finances but can also hamper different corners of your financial life. The good news here is that you can improve your score and transform it from “bad” to “excellent” with the right credit habits.
Ensure that you use credit responsibly, pay your bills and EMIs on time, keep an eye on your credit utilisation levels and monitor your credit report regularly to spot any errors. While your credit score may not shoot up overnight, following good fiscal habits will help you build your scores steadily and lead to a better and brighter financial future.