The disadvantages of having a bad credit score

The disadvantages of having a bad credit score

Your credit score or your CIBIL score is a 3-digit number that is considered a vital detail that financial institutions check before approving your loan application. The score considers your credit repayment history and gives the lender a fair estimation of the credit risk associated with lending money to you.

A recent survey suggested that almost 79% of applicants with high CIBIL score meet with loan and credit approvals.

Understandably, while it is vital to maintain a high credit score, it is also imperative for potential borrowers to understand other disadvantages, accompanying a low score. These can be far-reaching, especially since it takes years to build a good CIBIL score.

Consequently, it is best to take the necessary steps to maintain a good score and, in turn, avoid these disadvantages discussed below.

Lower approval rate

Amongst the disadvantages associated with low CIBIL scores, a lower rate of approval of loans is one of the most vital concerns. CIBIL score is an essential criteria that financial institutions check before loan approval since this score denotes creditworthiness of a borrower.

Lower ratings suggest a higher risk of default and as a result, financial institutions often do not approve these personal loans or other credit applications.

Higher rates of interest

Another common disadvantage, which often comes up with a bad credit score is that of higher interest rates, in case a financial institution approves a loan application.

Higher interest rate on a personal loan can be quite detrimental to a borrower since it increases his/her total repayment amount significantly. Financial institutions follow such a practice to nullify the risk factor associated with poor CIBIL scores.

Lower loan principal

Potential borrowers considering how to get a personal loan with a poor credit score should note that financial institutions often approve lower loan quantum due to the associated risk factor. This can be quite problematic for a borrower since a lower loan amount might be inadequate for the purpose which necessitated the credit application.

Limited tenor approval

Another issue that often arises is that of shorter repayment tenor for the loan. This can be especially difficult for borrowers since it forces them to bear a higher EMI amount, thereby adding to their monthly financial burden.

Higher chance of hard enquiries

One of the lesser-known disadvantages of applying for a personal loan with low credit score is that of hard enquiries by financial institutions. Financial institutions often look at detailed credit reports to understand associated credit risk for a borrower with a bad score.

In turn, multiple hard pulls also lead to further depreciation of this score, which makes it even more difficult for a potential borrower to avail a loan.

Difficulty starting a personal enterprise

There can be various reasons for loan applications, including that of starting a personal business or enterprise. While there are stipulated loan products for such needs, personal loans are also considered a viable option to tackle such circumstances.

With higher rates of interest being applicable due to poor credit scores, borrowers might opt for other options like approaching angel investors. In turn, this costs a portion of the ownership rights and shares.

Poor credit score’s influence on employment

Individuals looking to secure employment today are often required to submit their credit reports during interviews. This is especially true for finance and allied sectors. Also applicable in insurance and telecom sectors, lower CIBIL score suggests financial indiscipline, which is a major deterrent in employment.

These pointers discussed above, emphasise on the necessity of maintaining a high credit score. Subsequently, borrowers planning to opt for a line of credit like a personal loan should build their score over time.

Typically, financial institutions are reluctant to extend a line of credit to an applicant with a poor credit rating. Conversely, any CIBIL score above the desired range is likely to meet with instant approval from lenders.

Renowned NBFC like Bajaj Finserv even provide pre-approved offers, which make loan applications convenient, as well as prompt. Such offers are provided on various financial products like personal loans, business loans, etc. You can easily check your pre-approved offer by providing your name and phone number.

Ideally, a 750+ credit score for personal loan is considered good. Any borrower with a score above 750 can expect high loan quantum, extended repayment terms, along with other favourable terms on their personal loan, as long as they fulfil other necessary criteria.

Potential borrowers planning to apply for any line of credit should check for the things they can do to improve their personal credit score. Additionally, it is also advisable to compare different loan options and plan its repayment by checking total EMI amounts with an online loan calculator.

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