Five Reasons Why a Bad Credit Score Can Lead to Loan Rejection

Your CIBIL score or credit score is an essential factor when it comes to availing of a loan. It is based on a loan applicant’s credit profile and credit history, indicating their payment patterns. Credit scores range from 300 to 900, wherein 300 is the lowest score and 900 is the highest. Typically, a score of 750 and above is accepted when considering loan eligibility. 

What is a Bad Credit Score?

A bad credit score typically falls in the range of 300-500. This score reflects low creditworthiness and can make it challenging for you to secure a loan at competitive terms. Factors such as delayed payments, high credit utilisation, and frequent credit applications contribute to a low score. To improve your score, it is essential to maintain timely payments, manage credit wisely, and avoid excessive borrowing.    

Implications of a Bad Credit Score

A good CIBIL score indicates creditworthiness and tells lenders that you are capable of managing a loan. A low CIBIL score, on the other hand, is a measure of inconsistent credit behaviour. It indicates that you pose a credit risk and in such a case, lending institutions may approve your loan application but at a higher rate of interest. This can increase the overall cost of your loan.             

Top Five Reasons for Loan Rejection with a Bad Credit Score 

The following are some of the reasons why your application may get rejected: 

1. Over-Borrowing from Lenders

Lenders may not favour frequent borrowers. Those who have numerous loans to their name are thought to have debts in excess of their financial position. Thus, even if you hold a clean credit history, it may adversely affect your credit score and you could face loan rejection.   

2. Your Credit Report has Unfavourable Comments 

Your credit report includes information about your past loans. Any deviation from the original loan repayment terms will be noted in your CIBIL report. Negative remarks from previous lenders, such as 'settled' or 'written off', are indicators that can adversely affect your loan approval chances.

3. Multiple Unsecured Loans

Secured loans are backed by collateral which reduces the lending risk. Whereas, unsecured loans have no pledged security and are hence considered riskier. If you have obtained more unsecured loans as compared to secured ones, lenders may hesitate to take up your loan application. 

4. Guarantor to a Defaulter

When you sign as a loan guarantor, you are held responsible for the loan repayments in case the actual borrower defaults. As a result, your CIBIL score might be negatively impacted and you will find it tough to avail of any credit in the future. 

5. Rejected Loan Applications

All your previous loan applications and probable rejections are registered in the CIBIL report. Each time you apply, lenders access your credit records while processing the loan request. Remember, numerous hard enquiries can hurt your credit score. So, when you seek a new loan, lenders may reject your application. 

Also Read: Reasons Why a Housing Loan Application may be Rejected 

How to Improve a Bad Credit Score and Secure a Loan? 

The significance of a good CIBIL score cannot be undermined. Therefore, if you have a failing credit score, take corrective steps to increase it through the various ways given below: 

Check Your Credit Report

This is an important step in the right direction. Look up your credit report periodically to check your CIBIL score and see if there are any mistakes. Since credit scores are calculated as per the information in your credit report, it is imperative to safeguard against errors.  

Pay Outstanding Bills

Pay off outstanding credit card bills or loans to raise your CIBIL score. A history of delayed or missed payments lowers the score and vice versa. For the sake of convenience, you can opt for payment alerts or auto-debit features to ensure you pay EMIs and bills on time. Also, pay the full credit card bill and not just the minimum amount due as this will only increase the debt.

Maintain the Credit Utilisation Ratio

The amount of credit you actually use from the available limit demonstrates your ability to manage credit. Keep the credit utilisation ratio below 30% to preserve your credit score. Conversely, a higher ratio will decrease the score.

Retain Older Credit Accounts

Having a longer credit history adds to your credit score. If you have older credit accounts that show timely repayments, retain them in your credit record to establish your creditworthiness.   

Conclusion

It takes several months to effect a positive change in your CIBIL score through consistent and responsible credit behaviour. But if you do not possess a credit record, try to build your score by availing of a regular or secured credit card. Individuals seeking loans must ensure that they maintain a good CIBIL score even after obtaining the desired loans. An appropriate score opens up several avenues for enjoying the best loan offers at competitive interest rates.   

Also Read: Best Credit Score for Home Loans and How to Improve Yours