Effects Of Bad Credit Score

There can be several reasons why you have a bad credit score: 

• You have missed payments unintentionally because you forgot the payment due date.

• You have made payments late without knowing the impact of it on your credit score.

• You have generated too many hard inquiries against yourself by applying for multiple lines of credit at the same time.

But whatever be the reason, a bad credit score can cause you trouble in many circumstances. Wondering how? Let's dig a bit deeper into it.

Side-Effects of Bad Credit

You May Not Get Approval on Loan/Credit Card Applications

A credit score is one of the prominent parameters that banks consider while checking your loan or credit card application. Although other factors such as your income, employment status, and obligations (loans, cards) also matter; the credit score helps the banks in determining your creditworthiness. Thus, a bad credit score can lead to rejection of the application, since no lender would be willing to trust you.                            

You May End Up Paying a Huge Rate of Interest

Regardless of a bad credit score, it is likely that a few lenders will agree to give you a loan. Don't be too glad, however, as you may end up repaying a hefty amount for it. 

Let's discuss this with an instance: You get a car loan of Rs.10,00,000 for 4 years at a fixed interest rate of 12%. When you repay it, you end up paying an interest amount of Rs.264,024 on Rs.10 lakhs.

Now imagine a situation where you have a good credit score. You have been approved for the same loan amount for the same duration, but this time at a fixed interest rate of 9%. In this case, the total interest amount that you have to pay will be Rs.194,482. Subtract Rs.194,482 from Rs.264,024 - the difference is Rs.69,542. 

Is it worth to pay that much extra for the same loan amount? Ultimately, someway or the other, a low credit score leads to a loss for you.

You May Get a Loan, but on Unfavorable Terms

While there may be lenders who would still approve you for credit, beware of the terms, which may not be in your favor at all. Either you will get the loan on a higher rate of interest, or you will not be approved for the requested amount. Hence, these circumstances will put you under the pressure of either paying more or arranging the extra amount from other sources to serve your purpose.

Same is the case with credit cards. You may get approved for a secured card against a fixed deposit, but remember that secured credit cards generally have higher APR ranges than unsecured credit cards. This means that you will pay more interest while using them.

Starting Your Business Will Not be a Breeze

If you have aspirations of being an entrepreneur, it may either go in vain altogether or a hefty debt trap may put an end to your plans midway - all due to a bad credit score. Once again, the reason would be the same - that you won't get approval from banks for the funds to execute your plan.

In case you approach other financial institutions such as NBFCs, it may burn a hole in your pocket as they will take the risk of lending you money only at a really high rate of interest.

You May Face Emotional Distress Due to This Bottleneck

Let's think of some scenarios; where you decide to pursue higher education or you wish to buy a home. Essentially, these are your life goals. If you fall short of fulfilling them due to a bad credit score, will it not have an adverse effect on your emotions? 

Also, don't forget that a bad credit score doesn't improve in a day; it takes 6-12 months of responsible behavior towards credit repayment. Building your credit score takes a great deal of discipline and self-restraint, very often leaving one feeling frustrated and helpless.

To Wind Up

Just a bit of care can save you from all the troubles that have been mentioned above. Good credit is your helpful companion, whereas bad credit is not quite so. It is upon you to decide which side of the credit scale you want to be on.

Check your credit score regularly to keep track of your credit standing, be it to check for improvement or know how bad things are. With mymoneykarma, you can also get a detailed credit report analysis, along with credit repair services.