How does credit score affect your borrowings?
Did you know credit scores affect your job prospects besides future borrowing?
Nisha’s brother, Gautam, was visiting them for the first time after he started working. He even brought gifts for everyone and wanted to take them out for dinner. Nisha was happy for him but thought this was the best opportunity to talk to him about how reckless he was being with his finances since he got his first credit card. He was just paying the minimum amount due for the last two months and has delayed payments a few times already. Nisha wanted Arvind to make him understand the effect this would have on his credit score and in turn, his future.
So, on the way to the restaurant, Arvind asked Gautam how his new job was going.
“It’s great. I enjoy it, and the best part is the financial freedom it gives me. I think in a year or two I’ll be able to buy a car too!” Gautam exclaimed.
“We’re so happy for you! Bas ab saving bhi shuru kar lo” Arvind suggested. “And remember, credit cards are very convenient, but you must clear the bills every month to avoid paying high interests. At the current rate of spending, your credit card will soon max out, and even your credit score will dip. Then, you won’t just find it difficult to get a new card but also an auto loan.
“But what does my credit score have to do with that?” Gautam was worried.
“Everything,” said Arvind. “When you apply for a loan, your credit score is one of the first things the lender checks to determine your eligibility. While a bad score can reduce your chances of getting a loan, a good credit score can even help you get it at lower interest rates.
Say, for example, you took a Rs. 50 lakh home loan at 8% interest for 15 years. By the end of the tenure, you will pay an interest of Rs 36 lakh. Even a minor bump of 1% on the interest rate due to an unfavourable credit score can increase your total liability by about Rs. 5.2 lakh!” Arvind explained.
“Really? I had no idea so many things depend on my credit score”, Gautam was surprised.
“Here are some ways your credit score can affect your borrowings:
- Loan approval: A good credit score doesn’t guarantee loan approval, but it increases the chances as it assures the lender of timely repayments and lower chances of you defaulting. Similarly, a low credit score may not just cause delays but even rejection of a loan application.
- Interest rates: A good credit score gives you the power to bargain for a lower rate of interest because you would qualify as a low-risk customer. But someone with a low credit score is generally charged more interest to reduce the risk of losing money.
- Borrowing limits: Lenders are likely to approve more and larger loans if you have a good credit score as this shows you are responsible with money. While, it is not just harder to get loans, but you are less likely to get big-ticket loans with a low score.
You can also get great insurance deals with a good credit score.
- Repayment terms: A customer with a high credit score is revered and thus can negotiate on terms like tenure, fees and penalties, and instalment size. While someone with a low score will have to accept the given terms.
- Credit cards: If you have a good credit score, you can get credit cards with higher limits at lower rates with great benefits like rewards and cashback, unlike people with low credit scores, who may not get one at all. Making good use of credit cards can even increase your credit score.
- Housing: Nowadays some people take your credit score into consideration before renting out their property. Thus, a good score can help you rent an apartment of your choice.
A good credit score as your financial collateral enables and empowers you with:
- Higher chances of loan approval
- Competitive interest rates and higher loan and credit card limits
- Negotiation power on repayment terms
- Improved employment prospects
- Higher chances of renting a house
- Access to post-paid phone services
- Insurance with good coverage and premiums
“And lastly, this may shock you, but your future employment prospects also depend on your credit score. Employers these days aren’t just looking at your resume; they make a 360-degree assessment of potential employees. Some organisations now check your social as well as credit score to establish whether they can trust you or not,” Arvind informed Gautam.
Gautam got worried when he heard this, thinking about his future. Arvind noticed and spoke with a smile, “You are young, and if you start being responsible with your money and repayments, you can build a good credit score which will help you get a good deal on that car you’ve been hoping to buy!”
With this, they finished their dinner and Nisha sighed with relief.
Read How to improve a damaged credit score? to know effective tips to raise your credit score.
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