The recent RBI guidelines have asked banks and other institutional lenders to not report those availing the loan moratorium to the credit bureaus. However, repayment is just one of the factors determining your credit score. There are others like credit utilization ratio, credit mix, loan and credit card applications, credit mix, etc that impact your credit score.
This becomes particularly relevant in today's scenario where many are facing a cash crunch and may need a loan in the future to bail them out. A poor credit score will adversely impact your future loan eligibility, more so in the near future because banks and other financial institutions are likely to get stricter with their credit approval standards.
Here are six adverse effects of ignoring your credit score: Loans at higher interest rates
Those with a credit score of below 725 or 700 may find it difficult to get their loan applications approved, and even if they do, it's likely the cost of the loan will be considerably higher. Several lenders have started the practice of factoring in credit scores while setting interest rates for their loan applicants.
Given that applicants with higher credit scores have a lower probability of defaulting in their loan repayments, lenders tend to attract such borrowers by offering them loans at lower interest rates.
As those with lower credit scores are more likely to default in their loan repayment, lenders tend to compensate for the higher risk of lending by charging higher interest rates. Thus, having a low credit score can lead you to pay higher interest rates on your loans, which can adversely impact your long term financial health as well.
Lower credit card eligibility
Credit cards are not just about instant credit access for making purchases or payments. They are also an excellent medium of saving money in the form of reward points, cashback, discounts, free gift cards, vouchers, etc. If used in a disciplined manner, the monetary equivalent of your credit card’s benefits can easily exceed the associated annual fees.
Given that credit card issuers consider credit scores as a vital parameter while evaluating credit card applications, those with lower credit scores would have higher chances of having their credit card application rejected.
Lower eligibility for loan transfers
Whether it is a personal loan, loan against property, or home loan, the interest rates can vary widely across various banks and financial institutions. Lenders charging lower interest rates tend to entice existing borrowers of other lenders by offering them a balance transfer option.
Under this option, a lender allows the existing borrower of another lender to transfer his loan at a lower interest rate. This helps the borrower to reduce his interest cost. In return, the new lender pays off the applicant’s outstanding loan amount to his existing lender.
Some lenders also offer a longer tenure to those transferring their existing loans. This helps such borrowers to reduce their EMI burden. However, as with any fresh loan application, the lenders factor in the applicants’ credit score while approving their loan balance transfer application.
Some lenders may also factor in the applicant’s credit score while setting the interest rate of the transferred loan. Hence, possessing a ‘low’ credit score may deprive you from availing a balance transfer option to reduce your interest cost and EMI burden.
Higher fees and charges on loans
Similar to the case of interest rates, some lenders have begun rewarding those with higher credit scores by either reducing or even waiving off their processing fees and other charges. These charges together can constitute a significant sum of money, especially in the case of big-ticket loans. A poor credit score would not let you benefit from such reductions or waivers of charges.
Absence of pre-approved loans and credit card offers- Lenders and online financial marketplaces tend to provide pre-approved loans and credit card offer on the basis of your credit score and credit profile. These pre-approved loans generally have better product features, lower costs and even lower processing time.
These pre-approved offers not only enable you to get a fair idea of your loan and credit card eligibility, but they might also help in negotiating with other lenders for getting a better deal. Those with poor or no credit scores will not be eligible for getting such pre-approved offers.
Might adversely impact employment prospects
The trend of checking credit score during the screening of job applicants is slowly picking up pace among Indian corporates, especially in the financial sector. Those with poor credit scores are considered as financially undisciplined and hence, are considered as riskier to involve in corporate misappropriation or unethical acts.
Thus, those with a poor credit score might find it difficult to find jobs with companies using credit scores as a parameter for screening job applicants.
Radhika Binani is Chief Product Officer at Paisabazaar.com. Views are personal