From high interest rate to limited funds, 5 main consequences of a low credit score
A low credit score has a number of disadvantages which include high rates of interest, limited access to credit, high insurance premium, and restrictions in getting access to financial instruments.
If you are adhering to the conventionally accepted norms of borrowing and repayment, the chances are that your credit score will be high enough. Conversely, if your score has suffered because of the reasons beyond your control, you should be aware of the consequences.
Key consequences of having a low credit score:
1 High rates of interest: If you are approved for a loan with a low credit score, you are likely to be offered higher interest rates. This means you'll end up paying more in interest over the life of the loan compared to someone with a higher credit score.
2 Limited access to credit: Even if you are approved for credit with a low credit score, you may be offered lower credit limits, making it difficult to access the amount of credit you need.
3 Higher insurance premiums: Some insurance companies use credit scores as a factor in determining premiums for auto and home owners' insurance. A low credit score may result in higher insurance premiums.
4 Employment prospects in some sectors: While not all employers check credit scores, some do as part of the hiring process, particularly for positions that involve financial responsibilities.
A low credit score may raise concerns about your financial responsibility and potentially affect your chances of getting hired.
5 Other financial instruments: Some financial institutions may require a minimum credit score to enable individuals to buy certain products such as credit cards or personal loans.
A low credit score may restrict your options to access these financial products.
Overall, a low credit score can significantly impact your financial well-being and limit your opportunities for obtaining credit and other financial services. It's important to monitor your credit score regularly and take steps to improve it if necessary, such as paying bills on time, keeping credit card balances low, and avoiding opening multiple new accounts at once.
Frequently Asked Questions:
What is the key disadvantage of a low credit score?
Among several disadvantages, one of the key disadvantages is that you are likely to be offered higher interest rates even when a loan is approved.
Do lenders take a decision of giving a loan on the basis of borrower’s credit score?
Yes, lenders generally use credit score as a key factor in determining whether to approve a loan application. A low credit score may result in denial of credit or approval with less favourable terms.
Can it impact a borrower's chances of renting a flat?
There could be a possibility of finding it hard to find a flat in big residential complex which stick to the pre-defined criteria of shortlisting tenants on the basis of their credit score. Small landlords and housing complex, however, don’t bother to check the CIBIL score.
What is the impact of low credit score on insurance policy holders?
A low credit score could lead to higher insurance premiums.
What is the impact of low credit score on amount of loan?
When the credit score is abysmally poor, the loan application may even get rejected. But even if the application is approved, you may be offered lower credit limits.
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First Published:7 Mar 2024, 12:52 PM IST
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