Maintaining a healthy credit score is a crucial financial habit, but is often ignored. This lack of awareness, coupled with poor credit behaviour, leads to a poor credit score, which can have serious repercussions on your financial future. As lenders consider credit score as one of the key deciding factors while processing your application for a loan, an unhealthy credit score will make it very difficult for you to access credit.
What is an Unhealthy Credit Score?
Credit score is a 3-digit number ranging between 300 and 900 that represents your creditworthiness on the basis of your history with credit. It is measured by credit information companies or credit bureaus. When you apply for any kind of loan or credit card, lenders check your credit score to assess your repayment behaviour.
A credit score of over 750 is generally considered to be a high score and is a reflection of a responsible borrower with an excellent credit history. It is preferred by most lenders and credit card issuers. Consumers with a healthy credit score benefit from ease of access, wide choice of offers to compare and choose, the best interest rates and other favourable terms and conditions.
A score in the range of 700 to 750 is considered a good score, too, but may not be eligible for the best offers from lenders. A credit score between 600 and 700 is considered to be an average score and reflects that credit behaviour in the past has not been good. Very few lenders are likely to approve a loan application for consumers in the average zone. Any score below 600 is considered a poor credit score, and it’s unlikely any lender will offer you a loan.
Do note that a low score can also be a result of fraudulent activities or errors in your credit report. To avoid situations where your score has plummeted because of fraud or errors, check your credit report regularly, at least once a quarter, and take immediate action if you notice any discrepancies by raising a dispute with the credit bureau.
It’s critical that those who are below the healthy credit score bracket work on their credit score and improve it to avoid challenges in accessing credit in the future.
Suggested Read: 5 Most Important Things that Lenders Check in Your Credit Report
What is the Impact of an Unhealthy Credit Score on your Finances in Future?
Lenders may outrightly reject credit applications of applicants with poor credit scores, and such applicants might not get any unsecured loan. Loan rejections are also reported in the credit report and can in fact further lower your score. If you have a poor score and are in need of immediate funds, try to opt for a secured loan, such as a gold loan or a loan against property, instead of unsecured personal loans.
Some lenders might still approve credit applications of applicants with average to good credit scores. But these loans would come at unfavourable terms for borrowers and a high cost, as the lender is likely to charge a significantly higher interest rate and in some cases, also approve a lower loan amount.
A low score often leads to a financial crisis when one is short of funds in case of emergencies like a medical exigency. The inability to take a loan can also adversely impact your financial goals, like buying a home.
On the other hand, consumers with a strong credit score are the most preferred applicants for lenders. They are likely to get loans at the best interest rates, and sometimes with low or no processing charges.
How to Improve Your Poor Credit Score?
Improving your poor credit score is not an overnight process, it requires consistently responsible credit usage over a period to boost your credit score. Hence, it is better to take the necessary measures to improve your credit score timely. The most important aspect is to pay your EMIs and credit card bills in full on time. You should also avoid behaviour that’s a reflection of overdependence on credit, like making too many applications for loans or credit cards in a short span of time or maxing out your credit cards regularly.
Also Read: Ways to Improve Your Credit Score
You should check if the poor score is a result of an old credit account that may not have been closed, and has had pending dues for long. This can bring down your score drastically. Get in touch with the concerned lender immediately and take the necessary steps to close the account.
So, if your credit score is not in the healthy range, it is important for you to take proactive steps to build your score. Improving your credit score now would make it easier for you to access credit in the future and help in case of financial emergencies, and fulfil crucial life goals.
Note: An edited version of this article was published in The Hindu on 3rd Jun 2024.