Your credit score is nothing but a representation of how likely you repay your debts, maintain a balanced mix, keep your credit utilisation ratio within 30 per cent, etc. Bad things happen more frequently than we genuinely admit when it is about repaying your debt at a later date. A low score is a representation of your poor repayment history. Note that, a low score is not only an inconvenience, but it even can also impact your financial future deeply. That is why you must understand a low or poor score is important. Having a good score allows you to qualify for a loan deal from reputable financial institutions. For instance, to get a Bajaj or IIFL loan, a good Bajaj CIBIL score and IIFL CIBIL score, respectively are important. Discussed in this article is everything you must be aware of regarding poor credit score and how this can negatively impact your life if you do not take any action.
What’s a credit score?
A credit score is a numerical ranking that financial institutions use to determine whether to provide you with a loan or credit deal. Lenders might use a credit score to determine whether to grant you an auto loan, mortgage loan, home loan, etc. There are several parameters that lenders factor in when computing your score. The two most crucial parameters are the credit utilisation ratio and payment history. A credit score is computed depending on your past repayment history, the debt amount, debt amount used i.e., credit utilisation and the percentage of credit available for your use. Lenders factor in your score to determine if they will grant you credit.
How does your credit score function?
Your credit score is decided by a complicated algorithm that factors in many parameters. The most crucial ones are your repayment history and credit utilisation ratio. Repayment history displays how often you pay your dues. The more you pay, the better it is. Credit utilisation infers the amount of your over-debt divided by the credit amount you hold.
Also Check: Bajaj CIBIL Score
What is a poor credit score?
Though a low score is not a dealbreaker necessarily, it does show a considerable risk to a lender or if you are looking to borrow from an app. If a lender views you as an individual with high credit risk owing to your low score, there are various ways they can potentially screw you. Lenders can levy you a higher rate of interest. Or in the best case, they may give you the credit that you want because they assume you cannot repay the loan timely. A poor credit score can range anything between very low and bad. In general, a score of below 750 falls in the low credit score category.
How is a poor credit score computed?
When lenders view your score, they are basically looking at the factors given below –
· How often, you make payments of your dues
· Your payment history – how much do you owe, how long you have been in debt and your repayment potential.
· The current debt amount you owe.
· Credit utilisation – This refers to the percentage of your overall debt divided by the credit amount you hold.
What is the worst that may happen to someone holding a poor credit score?
There are two major outcomes that individuals holding a poor score may most likely face. Firstly, if you are one of those, then you may be denied a credit offer like – a car loan, home loan, credit card and mortgage. This means you will not be able to purchase a home, or 4-wheeler, or borrow funds for most things. Secondly, you may require paying a higher rate of interest on your credit or may be turned down the credit. This can massively affect your finances, particularly if you require borrowing funds in the future.
What are the things that can result in a poor credit score?
· You have not built up sufficient credit over the past.
· Having a lot of missing or bad info on your report.
· A lot of change or alterations in your score of over 10 points.
· Decreasing your payment amount.
· Increasing your amount of debt.
· Having a lot of open accounts.
· Having a credit account declared as risky.
· You hold a lot of credit limits.
· Holding a lot of credit accounts with an irregular past repayment record.
· Declining a payment.
· Missing a payment.
· Not making timely payments.
· Having a lot of late payments on your credit report.
· Making a lot of credit inquiries in a short time span.
What are the crucial parameters that impact your score?
There are various parameters that can affect your credit score and lower your chances of availing a credit card or loan. Let’s go through some of the important parameters that can pull down your credit score –
· Not reviewing your score –
You must check your score timely as it may decrease drastically due to a few mistakes or errors in your report.
· Missing out on your bill payments –
Not paying your dues or EMIs timely is a major parameter that can hold a negative impact on your score massively. You must avoid any kind of delays while repaying your EMIs and credit card dues every month. You must maintain discipline and ensure to pay all your dues on priority as this can have a major impact on your score. At the same time, you must try and repay all your dues in full and avoid making payment of the minimum balance due. In the case you do not pay your dues in full, you end up making payments to a lot of interest constituents.
· Maintaining a high credit utilisation ratio (CUR) –
You must try to maintain a low CUR (credit utilisation ratio). This ideally infers you must use up to 30 per cent of your credit limit. Using your complete credit limit suggests that you as an individual are credit hungry and may not be able to manage your finances. Surpassing your credit limit and holding a higher CUR (credit utilisation ratio) can have a negative impact on your score.