We have all heard the terms “good credit score” and “bad credit score” in ads, newspaper, and in articles related to financial well-being as well. But what does a good score mean, and how can it affect our creditworthiness?

Despite the growing awareness, many people aren’t aware of the consequences of a bad credit score and often are not able to improve it in a timely manner. Let’s discuss what a credit score is; what CIBIL is; what good and bad credit scores are; and, finally, how you can borrow money despite having a bad credit score. 

What is the credit score and how is it calculated?

In order to understand how credit scores impact loan applications, you need to know how they are calculated. Your credit score, or your CIBIL score, is calculated by CIBIL [Credit Information Bureau (India) Limited]. A CIBIL score is a three-digit number that shows your creditworthiness to the lenders. A credit score ranges between 300 and 900, and a score that is above 750 is considered a good credit score. A good credit score increases your chances of securing a loan without much hassle and acceptance of credit card application, while a bad credit score reduces your chances for the same. 

Various credit bureaus in India and the world use different methodologies to calculate the credit score of individuals. However, commonly, the account and inquiry section in a credit report is what helps to calculate the CIBIL score. Many factors affect the calculation of a CIBIL score; like the credit history, the credit mix, loan duration, outstanding credit amount, recent credit behavior, and credit utilization. All these factors are taken into consideration while calculating the CIBIL score of a person. Timely payments of loan EMIs and credit card bills ensure that you have a clean credit history. A proper mix of secured and unsecured loans ensure that you have a right credit mix; a low credit utilization rate ensures that you have a good credit score, and rejections to loan applications can negatively impact the credit score. 

It is vital to have good credit (CIBIL) score because most financial institutions determine the creditworthiness of a borrower based upon the same. A CIBIL score gives financial and lending institutions an overview of an individual’s credit history and their ability to repay his debts on time. So, if you have aa good CIBIL score (900 or higher), your chances of securing credit, when needed, are surely easier. Similarly, another advantage is that some financial institutions also charge lower interest rates to people with a higher credit score. You can check your CIBIL score directly on CIBIL’s website or use any of the many available online tools for the same. 

Credit scores: the Good, Bad, and Ugly

As mentioned earlier, a credit score above 750 is considered reasonably good by banks and other money lending institutions in India. A score below 750 is not considered very good, and banks/money lending institutions will exercise additional caution while extending a loan or credit card to such individuals. The following breakdown can help you understand what is considered an excellent credit score, good credit score, and bad credit score:

  • 750-900 – A credit score between 750 and 900 is regarded as an excellent credit score by banks and other financial institutions. With a score between 750 and 900, you are likely to eligible for the lowest interest rates while applying for a loan and can expect the approval to be granted without much delay or scrutiny. 
  • 700-749 – This is considered a good credit score by banks and lending institutions. With a credit score between 700 and 749, you are eligible for reasonable interest rates while applying for a loan and can expect minimal verification formalities. 
  • 650-699 – This is considered a fair credit score by most financial institutions. With a credit score between 650 and 699, you are eligible for certain loans and credit cards, but the options remain limited, and you should expect greater scrutiny of your application. 
  • 600-649 – All scores between 600 and 649 are considered an average credit score by banks, and although your application might go through, expect higher interest rates and limited flexibility. 
  • 599 and below – This is considered a poor credit score by most financial institutions. With such a score, the chances of loan approval are very slim. In most cases, loan and credit card application with such a score is rejected. If your score is in this range, you must immediately take steps to improve your credit score. 

The above scores are applicable for CIBIL, and there are a total of four credit bureaus in India that are RBI authorized. If you do not know your credit score, you can get your credit score online from the official websites of any of the four bureaus. And by paying a nominal fee, you can also have your credit report mailed to you.

How do bad scores affect the credit line?

A bad credit score may bring bad news to you when it comes to your financial health. Hence, it is always safe to maintain a good credit score. Here are a few disadvantages of having a low credit score: 

  • Your loan application might get rejected: When you have a poor credit score, banks and other money lending institutions might consider it risky to lend you money. A credit score determines your creditworthiness and your ability to repay a loan. And so, if you apply for a loan or credit card with a low credit score, chances are that your request might be rejected by the bank.
  • You might be charged a higher rate of interest: While the chances of your loan application getting approval with a low credit score are low; sometimes, certain money lending institutions do approve loans to customers who have a low CIBIL score. In those cases, the user is usually charged a higher rate of interest for the loan amount. Whereas, with a good credit score, the borrower can enjoy lower than usual interest rates. 
  • You might not get your dream job: Certain companies who consider the credit loan of candidates before hiring them for a senior position. If they find out that you have a poor credit score or high debts and a large number of outstanding bills, they might reject your candidature on this basis. So, it is necessary to maintain a good credit history. 
  • Difficulty in starting your own business: If you are an aspiring entrepreneur with a great business plan in place and are looking for credit to start your own business, chances are you might not be able to secure the loan you need if you have a bad credit score. Even if your application is entertained, you might not get the entire amount you apply for. 

How to get a loan with a poor credit score?

While people who have a low credit score face challenges while applying for loans, there are a few options they can exercise:

  • Take a joint personal loan with your spouse or family: When you have a poor credit score, you could take a joint loan along with someone in your family who has a good credit score. This improved the chances of approval.
  • Take a secured loan: In case you don’t qualify for a loan due to a poor credit score, you could opt for a secured loan where you need to present collaterals like fixed deposit, gold, land, etc. as security for the loan amount. 
  • Present a guarantor: Another way of getting a personal loan sanctioned despite having a poor credit score is presenting a guarantor. It could be a friend or family member who has a good credit score. However, remember that the guarantor will also be held accountable in the event you fail to repay your loan. 

If for some reason, you have been stuck with a poor credit score, you might already be aware that your chances of securing a house loan or a car loan are pretty slim. Before you consider borrowing from family and friends, do consider the possibility of taking collateral-free personal loans from lenders in the market.

Personal loans are a kind of unsecured loan and do not usually require securities or CIBIL scores. While the CIBIL score of an individual is still checked before granting a personal loan, it is relatively easier to secure a personal loan when you have a poor credit score.

Many non-banking finance companies (NBFCs) and new-age fin-tech companies, like PaySense, offer personal loans to individuals with low credit scores as well. Personal loans are usually granted without collateral or securities, but charge a higher rate of interest, owing to the higher risk involved. Thus, many people who are unable to qualify for loans from banks and other institutions often opt for instant personal loans, as they come with lower entry-barriers and provide greater flexibility. 

Pros and cons of personal loans 

There is no doubt that a personal loan is a quick way of getting money when you need it for medical emergencies, to pay off credit card debt, to pay for a sudden home repair, or to finance your wedding, etc. With the advent of digital companies, getting a personal loan is simple and doesn’t take very long either. Let’s take a closer look at personal loans and their advantages and disadvantages: 

Pros of Personal Loans

  • Use the money for any purpose: You borrow the amount you need and use it to finance your wedding, a holiday, a holiday, purchasing a television or anything you like. No questions asked!
  • Borrow any amount you want: You can apply for a loan amount as little as 10000 INR to a sum of 500000 INR. It depends entirely on your requirement and your eligibility. 
  • No collateral: Most personal loans are unsecured, which means that you do not need to provide any collateral while borrowing the money.
  • Flexibility in choosing repayment schedule: Lenders, like PaySense, help borrowers decide their own repayment schedule to offer greater flexibility and support in paying EMIs on time. 

Cons of Personal Loans

  • Higher rate of interest: Most personal loans are unsecured, and so the rate of interest is also high. While people with a good credit score are charged low-interest rates, the ones with a poor credit score are usually charged a high rate of interest. 
  • Missed EMIs impact credit score: Like traditional loans, there is no room to fall back on EMIs; a late fee is also charged if you pay the amount late. Failure to pay the EMIs also negatively impacts the credit score. The recovery process in case of defaulting on the loan is also more rigorous.  
  • Additional fee and charges: Organizations offering personal loans usually levy higher processing fee and foreclosure charges from their customers. They are also infamous of imposing hidden fees and charges of borrowers. However, lenders like PaySense are trying to change this perception and do not levy any hidden fee or charges on their customers. At PaySense, all the terms and conditions of the loan, along with the additional charges, are clearly explained to the customer before they sign the loan agreement.

In conclusion, you would benefit from following the age-old wisdom that prevention is always better than cure. Instead of finding ways to get a loan with a bad credit score, you must aim to improve and maintain your credit score. As discussed above, a good credit score (750-900) has a lot of benefits and ensures that you get a loan with a low rate of interest when you need it. Also, remember that improving your credit score is a long-term process and will not happen overnight. 

If you have a low credit score and require a loan, get the PaySense mobile app and create your profile to determine your credit line. You can avail a loan up to your credit line without any collateral from PaySense and repaying it on time will also help you improve your credit score. To know more about how you can get a personal loan, get in touch with us on [email protected]