Problems to Have with a Bad Credit Score


  • What are the problems that a customer can face having a bad credit score?
  • Some of them are higher interest rates, lower personal loan disbursals, difficulty in getting the balance transfer, etc.

You must have heard the term ‘Credit Score’ several times in conversation with your friends, family, colleagues, etc. Despite hearing it often, people don’t understand the importance of credit scores in their financial lives. First, what is a credit score and how can it be good or bad? Simply put, you can consider your credit score as the financial scorecard that ranges from 300 to 900. The score is given based on your loan or credit card repayment track of at least 6 months to a year. Any score of 750 or above is considered a good one while a credit score below 600 is considered bad by lenders.

When you have a good credit score, it brings a range of benefits such as lower interest rates, higher borrowing or credit limit, quick disbursal, etc. Whereas an individual with a bad credit score can face several problems such as difficulty in approval of unsecured loans like personal loans, higher interest rates, lower personal loan amount disbursal, etc. You must be thinking who defines your credit score as good or bad? Well, several credit rating bureaus such as CIBIL, Experian and others maintain your credit reports that have all your financial transactions.

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In this article, we are telling in detail the problems an individual could face with a bad credit score. So, keep reading!

What are the Problems that an Individual may Face with a Bad Credit Score?

A score of anything below 600 is considered bad by the lenders. This three-digit number can bring both advantages and disadvantages for you. We are showing some of the crucial problems you may face with a bad credit score. Please check it out.

Problems in Getting Approval of Loans and Credit Cards

Individuals require money to meet their various financial needs and how do they get the money? They can apply for Secured (Home Loan, Loan Against Property, etc.) or Unsecured (Personal Loan) to meet their needs. While getting any kind of loan, lenders ensure that they face minimum credit risk. In the case of secured loans, they have an individual’s assets as collateral. But in the case of unsecured loans, they have not any such thing. That’s why the role of a Credit Score becomes important here. Individuals with bad credit scores will face problems in getting approval of the personal loan and car loan.

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You must be thinking about why we are putting a Car Loan with a personal loan, which is an unsecured loan? The reason: A Car is a depreciating asset (its value decreases over time); that’s why it does not come in the category of secured loans. Lenders do not see people with bad credit scores as creditworthy individuals because of their history of missed repayments and defaults. So, any lender would not want to risk their money to a person who is unlikely to pay their loans on time. Instead, they would give the loan to an individual with a good credit score. Credit Score is one of the topmost eligibility criteria in getting approval for a personal loan or a car loan. This is one of the major problems individuals with a bad credit score face and this is why it is advised to make loan payments on time.

Other than a personal loan and car loan, individuals also face problems in getting a credit card due to bad credit scores. Lenders always check the credit score of an individual before providing the credit card. In case a lender approves a credit card to an individual with a bad credit score, chances of getting a higher credit limit on their credit cards are quite low due to obvious reasons related to bad repayment behavior. Apart from this, lenders will not offer special schemes on credit cards to people with bad credit scores.

Higher Interest Rate on Loans

As we said in the previous point, an individual with a bad credit score may face a lot of problems in getting his or her loan approved. Let’s say a lender approves the loan application despite a bad credit score, there are high chances that the lender might charge higher interest rates than usual. Although credit score does not play a major role in determining eligibility when it comes to secured loans, it is one of the factors that decide the final interest rates for an individual. Let’s understand it in this way. When a lender provides any kind of loan to a person with a bad credit score, the method to minimize the credit risk is to charge higher interest rates on the loan facility.

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People with bad credit scores do not have the freedom to negotiate with lenders about the interest rates as compared to people with good credit scores who have a lot of options at their disposal. When you have a bad credit score, lenders hesitate to sanction the loan amount. This is why they charge higher interest rates. Several lenders have a definite slab of interest rates decided based on credit scores. The higher the credit score is, the lower can be the interest rate and vice versa. Remember, you will end up paying a huge interest due to the higher interest rates because of your bad credit score.

Lower Personal Loan Amount Disbursal

When an individual has a bad credit score, a lender does not feel safe in lending the higher loan amount in the case of a personal loan. The reason is pretty simple. An individual with a bad credit score has a history of missed repayments and irresponsible credit behavior. A lender does not want to provide a loan amount to such individuals, that too without any security. As in the case of a personal loan, lenders have not any kind of asset on which they can fall back to recover their loan amount. That’s why people with bad credit scores usually get a lower loan amount as compared to individuals with a high score.

In a way, a bad credit score cripples the borrowing capacity of an individual. Apart from the credit score, lenders also check the monthly income and existing obligations to decide the final loan amount. But a bad credit score indicates that a person has missed repayment in the past and it can happen in the future too. Lenders will also charge higher interest rates on personal loans.

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No Balance Transfer Facility or Top-up Loan Amount

Balance Transfer facility helps those customers who are struggling with high-interest rates on their loans. This allows customers to transfer their outstanding principal balance to some other lender at a lower rate than the current one. But there’s a catch. Lenders do not provide this facility to people who have bad credit scores. Before permitting any borrower to transfer his or her outstanding balance, lenders check their credit score. Individuals who have bad credit scores (below 600) will surely face difficulty in availing of this facility. Lenders make sure that a borrower has been paying his or her EMIs on time until the time he or she wants to avail of the Balance Transfer facility.

Lenders offer low interest rates on a balance transfer to people with a good credit score. But due to bad credit scores, lenders may not allow a Balance Transfer facility. Apart from this, people with bad credit scores may also miss the top-up loan amounts over and above the existing loan amount which can be a huge setback for you if you need some extra funds. On the other hand, creditworthy borrowers can easily opt for both Balance Transfer and Top-up facility on different kinds of loans at affordable rates.

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