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

Your CIBIL score or credit score is an essential determinant for availing loans. It is based on a loan applicant’s credit profile, comprising their previous credit history and the associated payment patterns. Credit scores range from 300 to 900, wherein 300 is the lowest score and 900 is the highest. Normally, a score of 750 and above is accepted when considering loan eligibility. 

Implications of a Bad Credit Score

A good CIBIL score indicates creditworthiness and tells lenders that you are capable of managing a loan. A bad CIBIL score, on the other hand, is a measure of poor credit behaviour. It brands you as a credit risk and lending institutions will be reluctant to approve your loan application. And even when they do sanction loans, one should be prepared for lower loan amounts at higher interest rates. You may be offered harsher loan terms, and also levied heavier fees and charges that could increase the overall cost of your loan.       

Top Five Reasons for Loan Rejection with a Bad Credit Score 

A bad credit score is a result of a bad credit history. It essentially means you have not been able to do the right things required to maintain a good credit score. It can be the reason for loan rejection due to some or all of the following reasons:

1.Over-Borrowing From Lenders

Lenders do not usually 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

A credit report contains details of your past loans. Sometimes, lenders extend easier options during the loan tenor to cash-strapped borrowers and help them settle their loans. They might offer lower pay-outs than the actual EMI sum or even interest rate reductions. However, if you pay off loans in any other way besides the terms on which they were initially availed, it will be marked in your CIBIL report. Any negative comments or remarks by previous lenders in your record such as ‘settled’ or ‘written off’ are red flags that can harm your loan prospects.  

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 chronicled in the CIBIL report. Each time you apply, lenders access your credit records while processing the loan request. Remember, numerous hard inquiries can hurt your credit score. So when you seek a new loan, lenders will consider such records to be warning signs and turn you down. Moreover, if they find any inconsistencies in your loan application or with the related documentation, it could further add to your borrowing woes.       

Also Read:  Things to Consider Before You Apply for a Home Loan 

So How Can You 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 enhance it through the various ways enumerated here: 

Check Your Credit Report

This is a crucial 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.   

Summing Up

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 the most competitive interest rates.