Looking for a loan? Here are some adverse effects of a low credit score

Lenders who sanction loans to those having no or low credit score usually charge a higher interest rate and processing fee. This is in line with the practice in advanced economies where lenders factor in credit score while fixing the interest rate of loan applicants. Moreover, under the new external benchmark regime, the RBI allows banks to reset the lending rate of their existing borrowers in case of any significant change in their credit score. Hence, any steep downfall in the credit score of existing borrowers under the external benchmark regime can adversely impact their lending rates.

Lenders and online financial marketplace usually offer pre-approved loans and credit cards primarily on the basis of credit score. These offers may beat others in terms of product features and processing time, which may also help in selecting or negotiating with lenders in the future. Poor or no credit score will deprive you of getting these pre-approved offers.

Credit cards have become a crucial financial tool today. Apart from providing instant credit, they also come with enticing benefits like discounts, interest-free EMIs, rewards/air miles, cashback offers, etc on card transactions. As credit score is one of the major factors considered by the card issuers while approving credit card applications, most lenders refuse to approve credit card applications of those having low or no credit score. Even existing credit cardholders may face difficulty in getting credit limit enhancement due to poor credit score. An enhanced credit limit will increase your spending power through your credit card and thereby, your ability to deal with financial emergencies.

While credit score is not yet widely used for screening job applicants, the trend is slowly picking up among Indian corporates too, especially in the financial sector. Those with poor credit score and having past record of defaulting on their credit card dues and EMIs have a lower chance of securing a job with such companies. Such companies may consider the frequent delays in repayments as an indicator of financial indiscipline or not living up to agreements. Similarly, excessive debt might indicate increased chances of committing fraud or unethical acts.

The growing importance of credit score has made it necessary for those with low or no credit score to improve or build their score. Those with low credit score can improve their score by repaying their credit card bills and loan EMIs in full by the due date, maintaining a CUR of below 30 percent, avoiding direct loan or credit card inquiries, maintaining a balanced credit mix and reviewing their credit report at regular intervals to rectify clerical errors or illicit transactions. Those with no credit history can build their credit score by applying for a regular or secured credit card.