The hidden costs of a low credit score: It's not just high interest rates on loans

When applying for a personal loan, borrowers are usually expected to have a good credit score. Someone with a poor credit score generally fails to secure a personal loan. Even if they receive a loan offer, it is typically given at a high interest rate.

Therefore, it would not be wrong to say that a low credit score carries a hidden cost. This cost is paid in the form of a high rate of interest. Apart from a higher interest rate, there are several other disadvantages. These include the following:

Hidden costs of low credit score

I. From loan denials to high interest rates: As mentioned above, borrowers with poor credit scores are generally given loans at high interest rates, even if they are approved. A small increase of 1% interest can cost you dearly over a long period. For example, if you borrow ₹5 lakh for three years and the interest rate is 11% instead of 10%, the additional cost you would incur is ₹8,487.

II. Personal matters including marriages: There have been instances where weddings get called off because of poor credit score. One incident happened in Maharashtra where a poor CIBIL score of groom led to cancellation of marriage by the girl's family.

III. Job prospects: Although this is still not too common in India, some employers do pay attention to the candidate's credit score before giving a job offer. A poor report can show poor credibility, leading to denied job offers — even if it is not directly related to finance.

Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.