06-Apr-2017 written by : FSI-Team
No one wants a poor score. But if we have been careless with credit in the past or owing to hard times if we were not able to meet our financial commitments, it can completely spoil our score. Some people may not give much importance to having a poor credit score because they are not looking for credit in the near future. But a damaged credit profile can create more obstacles, some of which don’t even involve borrowing.
Here are a few things that a poor score can prevent you from doing
1. Difficulty in Obtaining Loans: This is the most tangible of all consequences of having a poor credit score. Lenders depend on the three digit numeric, commonly called as the CIBIL score, to measure your chances of default. The lower your score, the higher are your chances of default. You would be categorised as a "risky" proposer.
Clearly, credit institutions stay away from doing business with those who pose a higher threat of evading payments in future. You may not have intentionally planned to have a low credit score but it can project you in a poor light. Thus, a score below acceptable levels can make it difficult for you to access credit in future.
2. Higher Interest Rates and Restricted Terms: This is another evident by product of having an unacceptably low credit score. It is simple economics. Lenders add a premium to the interest rates charged to cover the additional risk in lending a borrower who poses a greater risk of default.
For instance, we know that a personal loan is an unsecured loan and therefore it has a high rate of interest, typically between 12% and 24%. Let us take the case of two people who have the exact same background and income. If one person has a high score, say more than 760, while another has a low score, say less than 650. Keeping other things constant, the person with a high score is more likely to pay a rate close to 12% while the one with the lower score would have to bear a higher rate, close to 24%.
Apart from this lenders may impose stricter norms for the one with a low score, as they expect that person may not repay their money on time.
3. Employment Opportunities: With a below par score, a lot of employment opportunities can be missed. According to a recent report there has been at least a 25% growth in the number of employers who checked credit report of potential job applicants before hiring them.
Your credit score is an important window to your past. Though employers are not much interested in what you do in your personal life but your score indicates how responsibly you handle your personal finance.
A poor score reflects that you haven't been too conscious of your duties towards your creditors. Employers would generally conclude that such a person would turn out to be a liability for the company, as he or she has displayed an irresponsible behaviour. They would be disinclined to consider that application any further.
4. Sour Personal Relationships: Relationships can become sour due to a poor score. For instance, you may have to pay a higher rate of interest because your spouse, who is also a co-borrower on your HDFC home loan, has a lower score. This can be a bone of contention between couples.
Or, your personal loan application is rejected due to a poor score and that upsets your family members as they were betting high on that loan. Family members may blame the primary borrower for not being able to fulfil their demands.
You may have never mingled relationships with finance but absence of funds can dampen hopes and plans made by others in the family. This can hurt your equation with other members of your family.
So you see how things can turn for the worse with a poor credit score. A poor score means you are a risky borrower. And lenders don't like to deal with those who have elevated credit risk. Not only that, a substandard score can affect other aspects of your life that don't involve credit at all. You obviously don't want that. Therefore, maintain a score that is favoured by all institutions.
Your credit score is your responsibility. Shape it up with good actions and reap benefits of that in future.