A good credit score gives you many benefits: a great range of rewarding credit cards, favourable interest rates, and good features on loan products.
On the other hand, a low credit score makes your life difficult on many grounds. A credit score in the 300-500 range will cause you to miss out on great credit product deals, and your future loan applications may get rejected.
We will discuss some of the most common disadvantages of a bad credit score. Not just that, we will also highlight some ways to get out of a bad credit cycle.
Getting your loan application rejected
Lenders and banks consider it risky to deal with a low-credit-score borrower. So if you have a low credit score, chances are you will get your loan application rejected, be it a home loan or a car loan.
Subject to high interest rates
Even if a bank or financial institution approves your loan or credit card application. However, if you have a low credit score, you will be charged a high interest rate on any credit product you use.
You will have to pay a higher insurance premium
Insurance companies do a thorough credit background check before giving you insurance. You will be charged a higher premium for your insurance plan if you have a low credit score. This is one of the key disadvantages of a bad credit score, as it can result in higher costs for essential services like insurance.
Challenges to opening your own business
In most cases, starting a new business requires the assistance of a business loan. But with a low credit score, it will be very difficult for you to land a business loan from any lender.
Miss out on best rewarding credit cards
The best credit cards are reserved for customers with good credit cards. These cards offer the best cash-back offers, and you earn high reward points for card usage. The best credit cards offer rewards and cashback on dining, entertainment, shopping, groceries, and fuel.
But a low credit score will not give you access to the best credit cards in the market.
Also, you will have to settle for the credit limit the lender thinks is suitable based on your credit score.
Achieving your financial goals will be delayed
Bad credit also impacts your financial growth. When you have to pay a high-interest credit card bill, putting aside money to achieve your financial goals becomes difficult. This is one major disadvantage of a bad credit score, as it restricts your ability to save and invest for the future.
How to get out of the bad credit cycle
Being aware of your credit score is important; then, only you can try to get out of the cycle. The first step you could take to get out of debt is to hit the pause button when it comes to credit usage.
Snap out of too much credit utilization, pay your existing credit card bills on time, and try to close as many credit facilities as you can before applying for a new credit card. Also, don’t apply for too many credit cards or loans simultaneously.
Common Credit Myths That Could Impact Your Credit Score
- Not All Debt Is Bad Debt: Some debts, like mortgages or student loans, can help build your credit and may offer long-term financial benefits.
- Using a Credit Card Isn’t Always Bad: Responsible credit card use, such as paying on time and keeping balances low, can improve your credit score.
- Carrying a Credit Card Balance Isn’t Necessary: Paying off your balance in full each month avoids interest charges and helps maintain a good credit score.
The takeaway
A bad credit score is not just harmful to your finances; you also miss out on multiple other benefits a credit card has to offer. A disadvantage of a bad credit score is that it can lead to higher interest rates, lower credit limits, and difficulty in getting approved for loans or credit cards. Try to keep a close eye on your credit score and maintain a number above 700.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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