With the awareness about credit bureaus and credit scores increasing, people now know that it is not just a good thing to have a good credit score, but it is critically important since these scores have the potential to limit one’s ability to have access to loans and other credit facilities. In fact, a bad credit score can potentially lead to impacting facets other than just the availability of loan.
Here are some of the ways a bad credit score can negatively affect you:
1. Unfavorable terms of credit
Unfavorable terms of loan refer to the higher rate of interest, low loan to value of collateral, shorter term of credit, among others. While one may not realize but the fact is that a higher rate of interest leads to a huge financial outflow of interest. An increase of 1% on a home loan will cost the borrower lakhs of rupees of additional interest.
Similarly, if a person is putting up the property as collateral with a market value of, say, Rs 1 crore, the bank may just decide to extend a loan of Rs 35 lakh. A good credit score would fetch him anything from Rs 50 to Rs 60 lakh. This is practically devaluation of the asset.
2. Loss of opportunity
This is a big one and can derail the objective of seeking financial freedom without one even realizing its impact. A bad credit score leads to rejection of loans, but what one may not realize is the fact that these rejections will further lead to losses. Let us take a real life scenario. A person selected a house for buying. However, the loan rejection led to non-fulfillment of his dream. Committed to achieving the objective, he took all necessary steps and with great effort was able to have his score improved. However, since it was a process of months, the property got sold to someone else and to top up the losses, the property prices had gone up. He then had to borrow a higher amount to be able to buy a house.
3. Insurance premiums
People may not be aware of this, but large ticket insurance covers have now started to undergo underwriting at many insurance providers. There may be a chance that one may get charged with a higher premium if the underwriter finds the credibility to be under stress. While this is not being done for every insurance cover, but it may just be a matter of time before Indian insurance companies also start factoring the credit bureau records to arrive at a decision on approval and the premium as is the case in western economies.
4. Telecom connections
Akin to insurance, the telecom industry also considers credit scores to decide on fate of the postpaid connection. The telecom industry is also one of the businesses permitted to access and contribute data to credit bureaus in India as per the CIC Act. As per industry information, the telecom industry is also developing the bureau score and cut offs to decide on the fate of a postpaid connection.
5. Calls from debt collectors
While all others are related to monetary losses, calls from debt collectors can lead to mental and psychological challenges. We all know that dealing with collection agents is not an easy task. Their persistent follow up and intensity only increases as time lapses. One may feel hapless if in such a situation.
As we see, a bad score can lead to increased complications in life and, thus, it becomes quite important to manage one’s credit profile and credit score.
(By Arun Ramamurthy, Director, Credit Sudhaar)