Most of you are familiar with the crucial credit score when applying for a loan or credit from banks, NBFCs, or third-party lenders. Numerous people are unfamiliar with their CIBIL score and end up in credit troubles. Interestingly, there are multiple reasons why anyone would have a bad credit score. Before moving ahead, it’s important to know the reasons behind low credit scores.
Poor Payment Track Record: Your past payment history is a crucial factor that affects your credit score. If you have frequent EMIs delayed or missed, your credit score is poorly impacted. Moreover, if you are marked as defaulted by any bank, your credit score will still decrease. Regardless of the EMI amount, your delayed or missed payments decrease your credit score.
Multiple Queries for Credit: Many loan borrowers make multiple queries at different platforms to check their eligibility and find the lowest price. Unfortunately, this decreases your credit score. The reason is all platforms request the credit score that puts you under the ‘credit hungry’ category. Moreover, previously rejected credit applications also impact your credit score inversely.
Errors in CIBIL Score: If your credit score is low, that doesn’t mean you are a defaulter or have bad transaction history in the past. Sometimes, CIBIL reports have incorrect data resulting in miscalculation and decreased credit scores. There are numerous cases of identity theft that result in erroneous mention of repayments decreasing your credit score.
Heavy Usage of Credit Limit: You are always given credit assets (credit card, personal loan, home loan, etc.) below your credit limit. It is also advised to utilize the minimum amount in your credit limit. Yet, many people make maximum credit utilization that affects their credit score. Many users use up to 90 percent of their credit limit, which shows thigh dependency on credit.
High Amount of Unsecured Loans: If you have high exposure to unsecured loans, your credit score will experience a big dip causing you future troubles. This doesn’t mean you get affected only with a single loan. Instead, when you continue taking multiple unsecured loans, e.g., personal loans, credit card loans, etc., you would have a high chance of getting a low credit score in the future.
These are the reasons why you might have a bad credit score. For some, a bad credit score isn’t a big issue; but it is a problem in various situations. Below are the ways how a bad credit score can harm you.
1. Problem in Getting Loan: You won’t be surprised to know that a bad credit score will always be a hurdle in getting a loan. The first step ever financing companies consider to assess your eligibility is checking your credit score. In India, the CIBIL score is considered to evaluate the candidate’s eligibility. Your creditworthiness analysis is essential to get quick loan approval.
It becomes tough to get a car loan, mortgage loan, or even credit card with a low credit score. Even if you qualify for any option, you will definitely get a high-interest rate which isn’t a good option. Even if you get a credit at a high-interest rate, you move towards default risk. A credit score between 700 to 900 is considered best to get any loan at the lowest interest rates.
E.g., If you are planning to buy a house, chances are you won’t get the loan of your expected amount. Furthermore, some lenders may charge you high due to a low credit score. This will directly impact your EMIs and affect your monthly budget.
2. Fewer Renting Options: Homeowners who take a high-interest rate due to bad credit scores suffer while applying for the loan. Moreover, their problem doesn’t end here. Their problem further persists when they try to rent out the property. No tenant ever wants to live in a property where the landlord cannot pay rent to the banks on time.
Taking it from another aspect, homeowners sometimes consider such tenants who own a good credit score. The reason behind this is if the tenant is unable to repay banks on time, there isn’t a guarantee of getting rent on time. This brings you to a tricky situation when a bad score will compel you to find such a property where credit score doesn’t matter at all.
Another tricky situation occurs when you or your family is admitted to a private hospital. Most hospitals check your credit history to evaluate your repayment potential. It becomes challenging for bad credit score holders to get admission to the hospital in case of any emergency.
3. High Insurance Premiums: If you are getting a loan with a low CIBIL score, you obviously get it at a higher interest rate. Unfortunately, the insurance premium you buy against your loan will have a high premium. Most banks prefer taking personal insurance against every loan you take. However, your insurance premium increases gradually with higher credit at high-interest rates.
The prime reason behind such behavior is that people with higher credit in hand can face financial and mental stress managing their funds and are placed at a high risk of life loss. Factually this brings them under the category of higher insurance premiums.
4. Tough to Pay Deposits for Utilities: Every person prefers holding a special account to manage their utility bills and repay them on time. However, people with low credit scores find it tough to set up an account with a utility. Often such customers are suggested to deposit a specific amount before signing up. It ensures deduction from your deposits if you fail to repay the utility bills.
Sometimes it even becomes tough to get a postpaid phone connection as you have a bad borrowing history. Users with low credit scores are instead required to deposit a security deposit before getting their postpaid connection. It’s just an example; there are numerous other conditions when you find it tough to use a postpaid service.
5. Tough to Get a Dream Job: Most people have a dream job that they always love to pursue after their studies. Regardless of your experience in the industry, if you have a bad credit score, you will find it tough getting selected. Big companies track your past professional life and consider your credit score to know your spending behavior.
Most top company jobs require verification from your previous employer and police verification. Interestingly some companies would also request to track your credit score before scheduling your interview with HR. Some companies need to know how their employees manage their expenses and how good they are at money handling.
Employees who mishandle their salary face mental stress at month-end, which directly impacts the overall productivity. This is always a big concern for companies looking forward to working with employees and experiencing such a critical phase at month-end.
6. Relationship Troubles: You never want to surprise your partner with a bad credit score. It’s obvious that people with bad credit find it tough to manage their personal life well. No partner would love to know their life partner is under huge debt and is struggling with a low credit score. Such a stage brings in mental stress and develops relationship troubles in between.
You prefer skipping spending time with your partner and searching for various options to end your credit struggle. This further invites new problems that will affect your married life adversely.
7. Home Ownership Remains a Dream: Nowadays, the CIBIL score is the initial stage that decides further steps. If you plan to own a shelter for your family but have a low credit score, it’s hard to find a legit lender to finance your house.
Most people across the globe fail to purchase their dream home due to low credit scores that limit them from promoting their credit score and waiting till it comes above the margin.
With that said, you are now well educated about the negative aspects of having a low credit score. Financing experts always recommend putting your efforts into improving your credit score and getting required credits with low-interest rates in the future. Below are some effective tips to improve your credit score.
- Review Your Credit Report: Make sure you track your credit history and check for any discrepancies. If present, inform the authorities immediately and ask for an updated CIBIL report.
- Setup Auto Payments: You should prefer auto-deduction for your loans instead of manual payment. This will remove the stress of depositing money in the account.
- Pay Additionally in Your Billing Cycle: Make it a habit to pay at least twice in a single billing cycle.
- Don’t Close Old Credit Accounts: Whether you own a home loan, credit card, or any other credit account for years, it’s better to keep them as-is and focus on closing recently started credit accounts. It helps you build a positive credit score.
- Pay for Bigger Investments First: Make a habit of repaying the loans with a higher interest rate. It will help you minimize your expenses and focus more on investment.