One of the factors that determines whether a bank or finance company will lend to you or not is your credit score. An individual’s credit score plays an important role in determining his/her creditworthiness. A lender, such as a bank or a non-banking finance company, will evaluate the credit score of a potential borrower to determine whether to lend to the individual. The credit score also impacts the amount of loan sanctioned and the interest rate payable on the loan by the borrower. What is more, if a borrower has a low credit score, the lender may reject the loan application.
These seven actions can have adverse implications on future borrowings.
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Missed EMIs
If you miss your loan equated monthly instalment (EMI) payments, you are not only slapped with a penalty, but it also signals your inability to service a loan.
No loan history
If there is no active loan account or credit card, lenders have nothing to go by, i.e., you don’t have a credit history they can base their decision of lending on.
Unused credit card
If you own a credit card but do not use it, lenders will not be able to know your repayment pattern. Are you up to date on your payments or do you delay your card bill payments – again, just like you not having a credit history can be a deterrent to getting a loan, not using your credit card can adversely impact your credit score.
Loan enquiries
Making too many loan inquiries makes you a risky proposition for borrowers. Multiple credit inquiries are looked down upon by lenders as it is considered a sign of high credit risk, impacting the chances of getting loan approval.
Too many cards and loans
Having too many unsecured loans and multiple credit cards, shows the borrower is prone to frivolous spending. “Credit cards stand as the biggest variable while considering your credit payments which are done from the debts you hold. Carrying multiple credit cards can be a problem when you have to maintain the payments every month for each of the cards. And late payments can lead to reporting to the credit bureaus eventually lowering your credit score. If you are planning to have multiple credit cards, then you should not own them in a short span as this will decrease your average credit age thus lowering your credit card score,” stated the ICICI Bank website.
EMI option
Converting credit card payments into instalments signals spending beyond one’s repayment capacity.
Negotiated settlement
A borrower owes not only the principal but also the accrued interest and any incidental charges levied by the lender. Paying dues on time is the primary obligation of the borrower and the lender has the right to recover the entire amount. However, in case of exceptional circumstances, a borrower can request the lender for a one-time loan settlement that will allow the borrower to repay a lower amount than what is owed to the lender. But it has some serious consequences for the borrower’s ability to access credit later. If you have negotiated with a lender to settle your loan, it is not good for your credit score.