Jitesh Shah is a happy go lucky young media professional starting out his career in Mumbai. He was very ambitious and spent long hours at work and hung out with his friends during free time. Financial matters did not seem important to him. He was regularly maxing his credit card, missing loans EMIs, and when he ran out of cash, he was quick to apply for another personal loan.
Jitesh also checked his credit score sometimes. He learnt that it was going down rapidly but yet he could not fathom the need to have to a good score. He thought he could show financial discipline for a month or two and set things in order.
For all those like Jitesh who think that a bad credit score does not matter much or is easy to set right, we bring to you the following side effects of having a bad credit score.
A credit score is a measure of your creditworthiness and a good score demonstrates that you have acted responsible enough with credit, so you can be trusted again with credit.
Needless to say, a bad credit score just does the opposite.
Main Effects of a Bad Credit Score
Rejected Loan /Credit Card Applications
Your credit score is one of the first and foremost things that is taken into consideration when you apply for any loan. Of course, other factors like your income, other loans being serviced, and employment status also matter while considering a loan/credit card application.
However, your credit score is considered as a direct indicator of your creditworthiness. As mentioned above, it also signals your likelihood of repaying the loan. So, no lender would like to lend to an individual with a bad past of dealing with credit. This would be surely be the case when you approach traditional lenders like the banks.
The cost of rejected credit may end up having other manifestations. For Ex: You decide to pursue higher education from a foreign university, but your Education Loan ends up getting rejected, throwing your plans out of gear.
Additional Reading: How to Get an Education Loan with Bad Credit?
Higher Rate Of Interest
While some lenders may outright reject your application, there may be a few lenders who may still offer to lend to you inspite of a bad credit score. To compensate for their increased risk in lending to you, they may agree to lend at a higher rate of interest.
You may be under the impression that a percentage or two of higher rate of interest does not matter much. You may be right if it is a very small amount of loan with shorter tenures. However, when you consider bigger loans like the car or home loans, a percentage or two higher also matters a lot.
Ex: On a Car loan of Rs 7 lakhs availed at the rate of 10% for 5 years results in an EMI of Rs 14,872 while the same at 12% interest results in an EMI of Rs 15,571/-. When considered over the entire term of the loan, you end up paying Rs 42000 extra in EMI.
Loans On Unfavorable Terms
While some lenders may agree to lend at a higher percentage of interest, some others may agree to lend, but at terms which may not be favorable to you. These may end in different forms.
The approved loan amount may be much lower than what you actually applied for, which would again create unnecessary hassles for you in terms of arranging the rest of the amount. A shorter tenure may be approved. A short tenure with the same amount of loan would mean higher EMIs, which may prove to be a strain on your budget. A bigger down payment may also be demanded to approve your loan.
On the other hand, you may be approved a Prepaid Credit Card or Credit Card against a Fixed Deposit, both these may not solve your purpose of owning a credit card.
While the above-mentioned effects are directly related to your bad score and your future credit prospects, there can be many more which may come across as side effects of a bad credit score
Side Effects of a Bad Credit Score
May Affect Your Employment Prospects
Though not in popular practice yet, increased number of employers are asking credit reports of candidates during job interviews. This is especially true for sectors like financial services, insurance, telecom and regulators like the SEBI or the IRDAI.
A bad credit score often acts as a deterrent as the individual comes across as a financially undisciplined person. It is also thought that a bad credit score means a debt trap and an individual may not be able to focus much on the job at hand due to debt resolution.
Though you may have genuine reasons for a bad credit score, it is better to be on the good side as you may not get a chance to give your explanation.
Starting Your Own Ventures May Be Difficult
These days, everyone looks at being an entrepreneur and starting a business on their own. However, as great an idea may be, it requires funds for execution.
After bootstrapping, the first line of credit anyone looks for is from your existing banker.
With a bad personal credit score, your existing banker may not like to take risk on you venture. Approaching other sources of credit may prove more expensive for you.
More Number Of Hard Enquiries
With a bad credit score, you may need to apply for credit more often to fulfill your need, with unfavorable terms of credit adding to your woes. Each time you apply for credit and your lender pulls out your credit report from the credit bureau is considered as a Hard Enquiry.
Each hard enquiry, irrespective of the fact if the credit is approved or not, takes your credit score further down (although if you make consistent repayment of the credit approved, your credit score will increase). So, a bad score only gets worsened.
Additional Reading: Top 10 Tips to Improve Your Credit Score
Barring a few individuals, most of us apply for credit when we need it. Credit rejection when you need it the most causes financial distress, which in turn contributes to emotional distress too.
We would also like to stress on the fact that bad credit scores do not have any quick fix solutions, it takes anywhere from 6-12 months of responsible behavior toward credit to see your score move up.
For people like Jitesh, we as your Credit Coach would like to implore that a bad credit score affects you in more than one way, knowingly or unknowingly. So, we advise you to maintain a good credit score and lead a financial distress free life always.