Managing EMI After a Top-Up Personal Loan

This hampers your big dreams of owning a house, a car or something that you always wanted to own but couldn't in future. So, what happens when you have a low credit score?

Drawbacks of Having a Low Credit Score

High Interest Rates

As you all know, to get any kind of loan from a bank, you must have a high credit score. Even if you manage to get one, the lender charges a high interest rate. This means your monthly EMI will increase a shorter tenure. All this results in one thing – a great financial burden.

Limited Access to Credit Facilities

With a low credit score, lenders see you as risky borrowers so there is a high chance of rejection in loan applications, credit card applications and an inflated interest rate. So, when you need funds for important life events like buying a house or funding a wedding, you can’t plan it because of a low score.

Fewer Premium Credit Card Options

If your credit score is low, getting approved for premium credit cards becomes difficult. Banks may still offer you a card, but it will likely have fewer perks, lower rewards and a smaller credit limit. You’ll also have fewer options to choose from compared to someone with a stronger credit profile.

Eligibility to Avail Government Schemes for Starting a Business

The Indian government offers several schemes like MUDRA, CGTMSE, and Stand-Up India to support first-time entrepreneurs. If you are a small business owner, then you can avail collateral-free credit to start or enhance your business. However, many don't know that to enjoy the benefits of these schemes, they need a good credit score.

Even though these are government schemes, the loans are disbursed by banks or NBFCs. They run a CIBIL score check to analyse your creditworthiness. A credit score of 650 or above is preferred in MUDRA. If someone doesn’t have a financial history of their business, then the bank checks their personal history. A bad score lowers your chances of getting the benefits of government schemes even if your business plan is promising.

Higher Insurance Premium

Just like banks, insurance companies also consider credit scores. A bad credit score indicates that you are not regular with your payments. Hence, you have to pay high insurance premiums that adds up to your annual finances.

How to improve your credit score?

Timely payments for Credit Cards and EMIs

The best way to ensure you have a good credit score is to pay your credit card bills and monthly EMIs on time. Following deadlines enhances your credit portfolio and you don’t have to worry about getting loans. Set up auto-debits or reminders so that you don’t miss out on any deadline. For some reason if you don’t have enough funds to pay the full credit card bill, pay the minimum amount. It will keep your credit score intact.

Increase your Credit Limit

Increasing your credit limit boosts your score, how?

Well, asking for a higher credit limit and not using it improves your credit utilization ratio. A lower ratio means good credit management.

Let’s understand this with an example,

Say your credit limit is Rs. 1,00,000 and you spend Rs. 50,000 usually. So your ratio will be 50%. But if you increase it to Rs. 2,00,000 and your spending remains the same, your ratio drops to 25% - which is great for your score.

Mix of Secured and Unsecured Credit

Apart from your credit score, lenders also check how you handle different types of credit. A healthy mix of secured loans (home loans, car loans) and unsecured loans (credit cards, personal loans) shows that you can manage both types of loans. This boosts your credit portfolio.

If you are a credit card user, then opt for a small secured loan like a fixed deposit-backed loan and repay it on time to diversify your credit portfolio.

Maintain a Low Credit Utilization Ratio

In the above example, you understood how to maintain a low credit utilization ratio. The ideal ratio is using 30% of your total credit limit. On the other hand, don't max out on your cards. Even if you repay on time, your credit portfolio will show that you are dependent on credit. One way to avoid this is to spread out expenses across multiple cards.