Credit score is a three-digit numerical reflection of your credit worthiness. A credit score of 750 and above is considered as good by the lenders and hence, those having such a score usually have higher loan eligibility and can avail various financial benefits. On the other hand, a poor credit score can make it difficult to secure a loan, or get one at higher interest outgo.
Let’s understand how having a poor credit history can affect our finances.
Higher interest rate on loans:
Many lenders have started following the practice of risk-based pricing while setting loan interest rate. As applicants with a good credit score have lower probability of defaulting on loan repayments, lenders tend to entice such borrowers by offering them loans at a lower interest rate. On the contrary, given that those with lower credit score are more likely to default on loan repayment, lenders compensate for the higher credit risk of lending to them by levying higher interest rate. Failing to maintain a good credit score may force you to avail a loan at higher interest rate and thereby increase the overall interest cost.
Lower credit card eligibility:
The role of credit cards is no longer limited to being an instrument for accessing instant credit. Credit cards are also an excellent medium for saving money through reward points, cash back offers, discounts, free gift-cards, vouchers, etc. If used in a disciplined manner, the monetary equivalent of credit card benefits can well exceed the annual fee levied on credit card.
As credit card issuers consider credit score as one of the most important factors while evaluating credit card applications, those with lower credit score would have higher chances of having their credit card application rejected.
Lower eligibility for loan transfers:
The interest rate charged by various lenders for similar lending products can vary widely. Lenders often try to entice existing borrowers of other lenders by extending balance transfer option at lower interest rate. This allows existing borrowers to transfer their outstanding loans to other lenders at lower interest rate. In return, the new lender would pay off the borrowers’ outstanding loan amount to existing lenders. Some lenders also offer longer repayment tenure to those transferring their loan, which may help borrowers reduce their EMI burden.
However, as with any fresh loan application, lenders factor in the borrowers’ credit score and other facets of their credit profile before approving loan balance transfer application. Some may also consider borrower’s credit score while setting the interest rate of the transferred loan.
Higher fees and charges on loans:
Just like the interest rate, some lenders started waiving off or charging lower processing fee and other charges to those with higher credit score. As processing fee and other charges levied during the loan application phase can constitute a significant amount, especially in case of big-ticket loans, having a poor credit score can restrict you from availing reduced or waived off processing fee.
Absence of pre-approved loans and credit card offers:
Lenders and online financial marketplaces extend pre-approved loans and credit card offers on the basis of the credit score and profile of the consumers. Such pre-approved loans usually come with better features, lower cost and shorter processing time. This would enable you to get a fair idea of your loan and credit card eligibility, and also help negotiate with other lenders for striking a better loan deal.
The author is Chief Product Officer, Paisabazaar.com
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