Today, there are very few people who don’t own a credit card or who have not taken a personal loan at some point in their lives. With the increasing consumerist culture and instant gratification being the norm, it is common to see people maxing out their credit cards or taking out personal loans to achieve their short-term goals. This could be to buy the latest electronic gadget or taking that dream holiday. However, once the goal has been achieved and the euphoria has died down, what remains are EMIs to be paid. This is when reality strikes you and you realize that not paying your EMIs on time can have a far more longstanding impact than just paying a higher interest on your outstanding dues.
The Importance of a Good Credit Score
First, let’s understand what a credit score is. A credit score is basically a valuation of your creditworthiness. It shows how trustworthy you are with credit through how responsible you have been in paying off your dues. This gives banks and other lenders the data required to evaluate whether you are a good credit risk or not. After all, they have to be sure they will recover their dues if they lend it to you. If you have had a good credit history, they will be more likely to consider you a safe bet as they are sure you will repay the dues on time. On the other hand, if you have a bad credit score, it shows that you don’t have the resources or the financial discipline to pay off your dues. This will reduce the confidence that lenders have in getting back any money that is lent to you. This is why it is very important to have a good credit score.
Consequences of a Bad Credit Score
- Lower chances of getting loans or a credit card: If you have a low credit score or bad credit history, the chances of your loan or credit card application getting rejected are much higher. This can throw a wrench in your plans, such as when you need a home loan, vehicle loan, personal loan, or educational loan. Even if you want to apply for a new credit card for balance transfer of your old card dues, you may not be eligible if you have a very low credit card score.
- Hard enquiries: A hard enquiry is when a lender takes out your credit report from a credit bureau each time you make an application for a loan or a credit card. Each time a hard enquiry is requested, your credit score goes down further (even if you have a good credit score).
- Job prospects: While this is not widespread yet, some sectors such as the financial, telecom, insurance, and regulators such as IRDAI and SEBI can request your credit history when you apply for a job. You may come across as a person who has debt troubles and thus may struggle with concentrating on your career.
- Higher interest rates: There are lenders who will still give you a loan even if you have a bad credit score but this may be on higher interest rates in order to offset the risk they are taking by giving you a loan. While a small loan amount with a shorter tenure may not be affected much by higher interest rates, a higher loan amount over a longer tenure will be impacted greatly, resulting in you paying a whole lot more money than you would have otherwise. This is a major disadvantage of having a poor credit history.
- Unfavourable loan conditions: Another way you might be disadvantaged by a lower credit score is by being offered unfavourable loan conditions, not just limited to higher interest rates. You may even get a lower quantum of loan than what you applied for and may be offered a shorter tenure than what you intended. If a downpayment is needed, you might have to put down a larger amount when compared to someone with a good credit history.
- Venture capital: If you have dreams of starting your own business and are looking to raise capital for it, a bad credit score may hinder your chances of getting the required amount from investors as you may be considered a person with bad financial discipline and hence a risk. Whether you are looking to investors or a bank to fund your venture, a bad credit score may put a brake on your dreams.
- Stress: Last, but not the least, having outstanding dues to pay on your credit card or loan EMIs undoubtedly lead to stress which can impact every other area of your life, from personal relationships to your career and health.
All these are very good reasons to ensure that you have a tight rein on your finances. Use a EMI Calculator and pay back your dues and loan EMIs on time, every time.
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