What is Considered as a Bad Credit Score

What is a Bad Credit Score?

A credit score is a measure of your creditworthiness which is presented in a numerical format. It ranges between 300-900, 300 being the lowest and 900 being the highest. You should always work towards maintaining a credit score closer to 900.The majority of banks and NBFCs consider a credit score of 750 and above as ideal. Let’s take a look at different credit score ranges:

A credit score in the range of 300-550 is considered as bad. If you have a credit score that falls in this range, you will need to take serious measures to improve it. Having a bad credit score will not make you eligible to avail a loan or get a credit card.

What are the Factors/Bad Practices that Lead to low Credit Score?

There are several factors that can hamper your credit score and decrease your chances of getting a loan or credit card. Let’s take a look at some of the main factors that can bring your credit score down:

• Not checking your credit score

You should check your credit score from time-to-time, as it can go down drastically owing to some errors in your credit report.

• Delaying payment of bills

Not paying your bills or EMIs on time is the biggest factor that can have a negative effect on your credit score in a massive way. You should avoid delays while paying your EMIs as well as credit card bills every month. You should maintain discipline and pay all the bills on priority as it will have a huge impact on your credit score. At the same time, you should try and pay all your bills in full amount and avoid paying the minimum balance due. If you don’t pay your bills in full, you end up paying a lot of money in interest.

• Maintaining high credit utilisation ratio

You should try and maintain a low credit utilisation ratio. This ideally means you should use only 15-30% of your credit card limit. Using your credit card limit to the maximum suggests that you are credit hungry and are not able to handle your finances. Exceeding your credit card limit and having a high credit utilisation ratio can negatively affect your credit score.

• Closing old credit cards

Having a long credit history works wonders for your credit score. If you close your old credit cards, you lose out on years of good credit history and repayment behaviour. Hence, it is advisable to keep your credit cards active for as long as it is possible provided you are not losing money paying the annual fee.

• Applying for multiple credit cards

Applying for multiple credit cards at a time can make you look credit hungry. Therefore, it is advised to space out your credit card and loan application throughout the year instead of applying at the same time. A number of credit applications can trigger hard inquiries that can have a negative effect on your credit score.

• Not reviewing your credit report

A credit report is a summary of all your personal information, credit transactions, current as well as past credit accounts, and repayments. Errors in your credit report can bring your credit score down. Therefore, it is better to check your credit report periodically. Since 2017, the Reserve Bank of India (RBI) has made it mandatory for all the credit bureaus in the country to offer one free credit report to consumers in one financial year. At the same time, you can also visit BankBazaar.com and check your free credit score.

• Having multiple unsecured loans

It is important to maintain a good balance of both secured and unsecured loans. Having multiple credit cards and no loans will not help to improve your credit score intact. Therefore, it is better to have a good mix of different types of credit.

• Too many inquiries

A hard inquiry will show up on your credit report if you apply for a new credit card, loan, balance transfer card, business credit card, etc. Even though hard inquiries remain on your credit report for more than two years, credit bureaus only take into account inquiries from the previous 12 months while determining your credit score. Hard inquiries have been observed to significantly lower credit scores in people with a recent credit history or some credit accounts. Therefore, a hard inquiry can have a much greater negative impact on your credit score if you have just begun to build credit.

• Opting for settlement instead of closure

Lenders who write off loans promptly notify the relevant credit bureaus. Loan ‘settled’ is viewed as bad credit behaviour, so the entry stays in the borrower's credit history for a while and lowers their credit score by 75 to 100 points, based on the credit bureau. Additionally, it makes it challenging for the person to apply for new credit. The lender will be careful and might even decline to grant the loan if the borrower’s credit report demonstrates any 'loan settlement.' Therefore, experts advise choosing the closure of the account instead of opting for settlement.

• Failing to collect NOC

A no-objection certificate (NOC) is a document that lenders give to borrowers as proof that they have paid all of their debts. You must make sure to get your NOC from the lender after repaying your loan. It helps in resolving any disputes and legal issues that might develop in the future with respect to loan repayment. If you do not have an NOC, your credit score could be impacted. You might become ineligible for loans in the future.

Disadvantages of having a bad credit score

A credit score is an important factor that lenders consider while granting loans. A bad credit score not only makes availing a loan difficult, but has other disadvantages as well. Read on to learn more about other drawbacks of a poor credit score:

• Restricted credit card choices: A customer with a bad credit score is a risk to the credit card company. That is why a person with a bad credit score will get access mostly to secured credit cards. Do note that, there are possibilities that you may not even get considered for credit cards. This is because the card issuing company looks at multiple factors, along with credit score while giving credit cards.
• Higher rate of interest: A bad credit score not only reduces your chances of getting approved for a loan; it also puts you at the risk of paying higher rates of interest. You are a risky customer for the lenders, and that is why you may be charged a higher interest rate while granting a loan.
• Fewer credit rewards: Most credit card rewards require a good credit score to be accessed. With a bad credit score, you are likely to miss out on a lot of introductory offers, cashback and other incentives.

Measures to Improve your Credit Score

There are several measures that will help you improve your credit score:

• Get your credit report from Bankbazaar.com.
• Review and analyse your credit report. Make necessary changes and improvements.
• Fix your late payments by paying your dues on a timely basis moving forward.
• Pay off debts (if any) instead of transferring it to other accounts.
• A good way to build a credit history is to get a secured credit card.
• Increase the credit limit on your existing credit card.
• Have a good mix of secured and unsecured loans.
• Maintain a low credit utilisation ratio.

FAQs on Bad Credit score

1. What is considered as a good credit score?

The majority of lenders like banks and non-banking finance companies consider a credit score of 750 and above ideal.

2. How can I improve my credit score immediately?

Here are some of the ways in which you can improve credit score immediately:

• Increase the credit limit on your existing credit card
• Maintain a low credit utilisation ratio
• Pay off all the pending debts
• Fix errors (if any) in your Credit Report
• Limit credit card applications
• Don’t remove old credit accounts
3. What is the benefit of having a high credit score?

A number of lenders offer preferential pricing to consumers who have a high credit score. With a high credit score you not only become eligible to receive a loan but also get discounts on interest rates, processing fees, and so on.

4. What is the difference between a hard enquiry and a soft enquiry?

Hard enquiries are those that lenders make when you apply for a new credit card or loan. Soft enquiries, also known as credit report checks, are performed by people to check or track their own credit behaviour.

5. Can my credit score be lowered by soft enquiries?

No, soft enquiries will not impact your credit score. However, having too many hard enquiries can lower your credit score because they could reflect more dependency on credit and an increased burden of future repayments.