A credit score is a numerical representation of your credit history. It contains
every single detail of all the credit you have acquired over the years. A
credit score represents your creditworthiness and banks look to your credit
score before granting loans and credit cards. A good credit score not only
ensures that you get approved
credit cards and Loans but it also gives you
the opportunity to avail the best rates and a bad credit score will send your
application to the rejection pile.
What
affects your credit score?
Let us
look into some of the major factors that affect your credit score:
Payment History: Making a late payment might not seem like a serious offence
but it can definitely harm your credit score. Making late payments or missing
payments on your loans and credit cards can bring down your credit score
dramatically. Every missed/late payment is recorded in your credit report and
remains there for a period of up to 7 years.
Current Debts: Carrying
a lot of debt can also decrease your credit score.
Types of Current Credit: It is
important to have the right mix of credit products in order to keep your credit
scores up. Having the right balance between credit cards and loans will ensure
that your credit score is not affected.
Consequences
of a poor credit score
Listed
below are some of the major consequences of a poor credit score:
High
interest rates on loans
Banks
consider applicants with low credit score riskier than applicants who have a
good credit score. They compensate for the risk by making you pay a higher rate
of interest on loans and credit cards if you have a low credit score.
Rejection of loan applications
While
some banks compensate for the risk factor with high interest rates, other banks
will reject your application for a loan or credit card if you have a bad credit
score.
High
insurance premiums
Insurance
companies check credit scores too. They connect a low credit score to high
claims which in turn leads them to charging a higher premium.
Is it
possible to get a loan with poor credit score?
Banks and
financial institutions are cautious while granting loans to an applicant with a
low credit score owing to the risk factor. But despite what many think, it is
not impossible to avail loans with a low credit score. An applicant with a low
credit score can still get approved for a loan. Read on to know how:
Secured
Loans
Under the
secured loan option, a loan is granted to the individual against a collateral
security. The value of the collateral security should match the principal loan
amount to an extent. Banks are less reluctant to offer secured loans to
applicants with a bad credit score as they have something to fall back on in
case the applicant fails to repay the loan. Secured loans are usually
offered at a regular rate of interest regardless of whether the applicant has a
high or low credit score.
Unsecured loans
Unsecured
loans are best suited for individuals who are incapable of offering security to
the lender. Banks and financial institutions offer unsecured loans to customers
with a low credit score without requiring any security. These loans come at a
higher rate of interest to make up for the risk factor. These kinds of loans
will end up being very expensive owing to the high rate of interest.
Getting
loans with poor credit score is definitely tough, but not impossible. It is
important to read the fine print of the documents before signing a loan
agreement. While these options might help you get a loan, it is best to improve
your credit score so that you can get approved for regular loans without any
hassle the next time you apply for it.
