What Is A Credit Score? Why Is It Important?
Your credit score is a 3-digit metric, ranging from 300-900, that indicates your creditworthiness to the lender. This 3-digit number is a key factor in deciding your loan eligibility and credit card offers. Your score also determines the amount of interest you'll be charged on loans, and the type of loans you'll be eligible for.
It is calculated using the most recent information about your credit history, your credit card information, and your income. Higher the credit score, higher the priority you will have in terms of interest rates and repayment terms.
A credit score of 700 and above is considered ideal to get the best loans and credit cards in the market. A score of 600 and below is considered low and can make it pretty hard to get loans, or even get approved for credit cards.
1. Big Name Lenders May Not Consider Your Loan Application
Leading banks may consider you a high-risk applicant and not offer any kind of loan or credit card to you. While availing a loan, it is important to get them from reputed lenders as they have standard procedures and loan terms. With a bad credit score, leading lenders would not consider your loan application.
This will result in seeking loans and credits from lesser known lenders who might charge you a higher rate of interest, along with additional processing fees and other hidden charges. You could end up paying a lot more than your actual loan liability.
2. You Will Be Offered Higher Rate Of Interest And Unfavourable Loan Terms
When you have a mediocre credit score, your loans and credit cards will naturally come with higher rates of interest and stipulations that may even be more onerous than those of the big name lenders. These could make the loan repayment harder and you might end up committing a lot more time and money to your loan or credit card debt. If not managed properly, these high cost loans could put you in a debt trap that could last for years.
3. Your Insurance Premiums May Be Higher
Your score is of critical importance to all the major insurers and lenders. With a bad credit score, insurers would not be able to offer you cheaper insurance plans. Your credit score is an indication of your ability to pay for insurance and your creditworthiness to lenders. So it is only natural that the insurer considers you a high risk and prefers to offer you insurance plans that are more expensive than standard insurance plans.
4. Your Credit Cards May Not Come With The Best Rewards
You can very well get a credit card with a bad credit score. But will they have the best rewards and offers? We highly doubt it. An applicant with a bad credit score is only offered credit cards that are targeted at the middle-class customers, and those tend to be more expensive but offer lesser rewards and benefits than the more expensive credit cards.
5. It Will Take You Longer To Build Wealth
It is important to keep a good credit score during your entire life. Your credit score is an indication of your ability to pay for investments, saving and retirement. So your credit score is a key factor in whether you can save the money. With a bad credit score, you are given higher interest rates, which will delay your repayment on most loans, ultimately delaying your ability to build wealth for the future. With skyrocketing living costs, individuals are already bearing the brunt of high inflation. With bad credit scores, it is taking more time for people to build wealth and accumulate a decent amount of savings.
6. Rigorous Background Checks And Additional Scrutiny Of Your Loan Application
Though a few commercial banks and NBFCs would be willing to accept an applicant with a bad credit score, the loan application process could be long and arduous. The lender might want to subject your application to additional verification procedures, which could add extra time.
Conclusion:
Credit score is an important factor to lenders, who look at your credit score to determine your ability to pay for loans, insurance and other investment plans. It is the most reliable measure of a person’s creditworthiness, and a bad credit score could mean the difference between an immediate and a delayed loan.
Regardless of its importance, it is important to keep a good credit score throughout your entire life, including your loan application process. Individuals should understand that a few healthy habits are enough to build a respectable credit score. Paying your EMIs on time, using your credit card responsibly, maintaining a lower credit utilization ratio, not borrowing unscrupulously; these are simple credit habits that can help in maintaining a healthy credit score.
FAQs of What Are The Potential Side-Effects Of A Bad Credit Score?
1:What is a credit score?
Your credit score is a 3-digit metric, ranging from 300-900, that indicates your creditworthiness to the lender. This 3-digit number is a key factor in deciding your loan eligibility and credit card offers. Your score also determines the amount of interest you'll be charged on loans, and the type of loans you'll be eligible for.
2:How is my credit score calculated?
Your credit score is calculated using the most recent information about your credit history, your credit card information, and your income.
3:What is considered a high credit score?
A credit score of 700 and above is considered ideal and good.
4:What would be a bad credit score?
A credit score of 600 and below is considered bad.
5:Can I get a credit card with a credit score of 600?
Yes, you can get a credit card with a bad credit score of 600 but the interest rate, rewards and other benefits on your credit card will not be very good.