A bad credit rating can make it difficult to get a loan or get a loan with a higher interest rate.
The credit score is a digital three-digit reflection of your creditworthiness. A credit score of 750 and above is considered good by lenders and hence those with such a score generally have higher loan eligibility and can enjoy various financial benefits. On the other hand, a bad credit rating can make it difficult to get a loan or get a loan with a higher interest rate.
Let’s understand how having a bad credit history can affect our finances.
Higher interest rate on loans:
Many lenders have started to follow the practice of risk-based pricing while setting the interest rate on loans. Since applicants with a good credit score have a lower probability of defaulting on their loans, lenders tend to attract these borrowers by offering them loans at a lower interest rate. On the contrary, since people with lower credit scores are more likely to default on their loan, lenders compensate for the higher credit risk of lending to them by charging higher interest rates. Failure to maintain a good credit rating may force you to take out a loan at a higher interest rate and thereby increase the overall cost of interest.
Lower credit card eligibility:
The role of credit cards is no longer limited to being an instrument for accessing instant credit. Credit cards are also a great way to save money through reward points, cash back offers, rebates, free gift cards, vouchers, and more. on credit card.
Because credit card issuers consider credit score to be one of the most important factors when assessing credit card applications, those with lower credit scores are more likely to see their application for credit. credit card rejected.
Lower eligibility for loan transfers:
The interest rate charged by various lenders for similar loan products can vary widely. Lenders often try to attract existing borrowers from other lenders by extending the balance transfer option at a lower interest rate. This allows existing borrowers to transfer their current loans to other lenders at a lower interest rate. In return, the new lender would repay the outstanding loans from borrowers to existing lenders. Some lenders also offer a longer repayment term to those who transfer their loan, which can help borrowers reduce their EMI burden.
However, as with any new loan application, lenders consider borrowers’ credit rating and other aspects of their credit profile before approving the loan balance transfer request. Some may also take into account the credit rating of the borrower when setting the interest rate of the transferred loan.
Higher fees and charges on loans:
Just like the interest rate, some lenders have started to waive or charge lower processing fees and other fees to those with higher credit scores. Since the processing fees and other fees collected during the loan application phase can be a significant amount, especially with large loans, having a bad credit rating may prevent you from benefiting from the reduced processing fees or deleted.
Lack of pre-approved loans and credit card offers:
Lenders and online financial marketplaces offer pre-approved loans and credit card deals based on the credit score and profile of consumers. These pre-approved loans usually come with better features, lower cost, and shorter processing time. This would allow you to get a fair idea of your loan and credit card eligibility, and also negotiate with other lenders to get a better loan deal.
The author is Product Manager, Paisabazaar.com
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