How does bad credit score impact your chance of borrowing?

Ranjit PunjaCreditmantri.comIt is difficult - but not impossible - to get loans even with bad credit score. Each lender has a different set of requirements and criteria for lending. So it is possible that even if multiple lenders reject you, you might have a small chance to qualify with another lender. Most main stream lenders typically look for a credit score of at least 750 before they begin to entertain your loan application. People with a credit score of less than 750 usually find it difficult to get past the initial stage of the loan approval process, as they are considered relatively high-risk customers.So what is bad credit score? And what does your credit report has to do with it? Simply put, your credit report and credit score give potential lenders an idea of how reliable you are likely to be with repayment of a loan. In India, the three most popular credit rating agencies, or bureaus, that issue credit reports and credit scores to individuals are CIBIL, Equifax and Experian. Banks, NBFCs and credit card companies report all their customers’ credit-related transactions to these bureaus on a monthly basis. This information is recorded by the agencies in your credit report. It includes every detail of your credit activity including all your EMI and monthly credit card payments, including any late or missed payments, your total credit limit, balance outstanding, any written off or settled accounts, open loans, and even every loan or credit card application you have made (and whether it was approved or rejected), among other such data. In effect, all this information that is recorded in your Credit Information Report (CIR) (commonly referred to as a credit report) gives lenders a detailed track record of your past and present credit behaviour, and most importantly, whether you have been responsible in fulfilling your debt obligation in a timely and complete manner. Naturally, a high percentage of delayed or missed payments, any written-off accounts, high outstandings and other signs of bad credit are red flags for potential lenders.What is the role of a credit score in obtaining a loan?All this credit-related data contained in your credit report is subject to an advanced statistical analysis to arrive at your credit score. A credit score is a three-digit number between 300 and 900 that gives lenders an instant snapshot of your credit-worthiness. The higher your score, the better your credit profile, and the higher your chance of being sanctioned a loan. Your credit score allows potential lenders to make a quick judgement on whether you will be a high-risk or low-risk customer.So, for instance, a good credit score of 750 and above signifies a customer who has demonstrated consistently good credit behaviour across all loans, over a significant period of time. A borrower with good credit stands a high chance of being approved for any kind of loan. A score between 600 and 750 is middling. You might stand a chance with some borrowers but the chances of being rejected are high. If you have a credit score between 300-599, you stand no chance of being approved for an unsecured loan (like a personal loan or credit card) and only a very slim chance that you will even make it past the first stage of the approval process for a housing or auto loan. Credit history and its importance for different kinds of loans The kind of loan you are applying for also plays a role in whether you will qualify with bad credit. For a housing loan, which is typically for a relatively large sum with a long tenure, the credit score is important as lenders need to be assured that you have the ability to make payments over a long period. Some lenders might be willing to extend housing loans even with a bad credit history, but the terms will not be favourable – higher interest rates, lower LTV (loan to value, meaning that you will need to contribute a higher amount towards the home and your loan size will be lower), shorter tenures and will insist on a guarantor. Similarly, interest rates on a personal loan are likely to be much higher if you have a low credit score, and will almost definitely require a guarantor. Credit card issuers do not provide cards to those will a low credit score, unless this is an add-on card based upon someone else’s credit score. If you are applying for a gold loan, you are assured of disbursal, even with bad credit, since the customer offers gold as security against default.Disadvantages of applying for loans with poor creditWhile there is no bar to applying for a loan with bad credit, it is important to remember that you are likely to be further worsening your credit health with each loan application. If your application is rejected by multiple lenders because of your poor credit record, each rejection could cause your credit score to drop further and damage your credit health. Even if your application is approved, lenders will be wary about your poor credit record and will put in severe terms and conditions to safeguard their money. There is a strong chance that you will have to pay a higher interest rate, have a shorter repayment period, or get a smaller loan amount. What should be my first step to obtain a loan if I have a poor credit record?First, you need to concentrate on improving your credit. This can take an average of just 4-8 months, depending on how serious your individual credit situation is. Once you improve your credit score, you are in a position to have your loan approved and prevent the chance of rejection. Another big benefit of waiting to improve your credit health is that you can avail of more attractive loan terms that will lighten your repayment burden. Not everyone has a sterling credit record but the good news is that it is entirely within your power to rebuild your credit health. It needs some patience and perseverance, but the results of your credit discipline will be tangible in months, creating life-long conditions for faster and hassle-free access to credit.