Hidden Costs Of A Bad Credit Score

When people hear about the importance of good credit, they immediately think about loan approvals and interest rates. But the extra costs hidden with a bad credit score stretch beyond those very apparent factors affecting every corner of your personal finances.

Higher Interest Rates

The most direct financial implication of a bad credit score is that it increases the interest rates on loans and credit cards. Lenders perceive those with lower credit scores as riskier borrowers. To compensate for this risk, they raise the interest rates. For example, if you're looking for a Rs 10 lakh home loan with a poor credit history, you might receive an interest rate of 10 per cent, where it should have been at 8 per cent. Paying lakhs more than another person having a good credit score over a loan tenure of 20 years is possible in such scenarios. 

Steeper Insurance Premiums

In many instances, insurance companies rely on credit scores to judge the probability of claims. A poor credit score may raise a red flag against you, resulting in increased premiums for health, auto, and home insurance. For instance, an auto insurance policy that might have cost Rs 15,000 per year for someone with a good score could rise to Rs 18,000 or more for someone with poor credit. This difference compounds over time.

Limited or Expensive Renting Options

Many landlords also look at credit scores as a means of filtering through applicants. Poor credit scores can cause an application to be rejected or ask for a higher security deposit. If one is looking to rent a property that costs Rs 20,000 per month, good credit would imply paying two months' deposit. If you have poor credit, you may be asked for 4 or 6 month deposit, which will drain your savings.

Less Access to Utility Services

Utility companies offering electricity or internet services may conduct credit checks for a new connection. If a person has a low credit rating, they may require an advance deposit on the service. For example, instead of beginning a free service, they may demand an advance amount of Rs 5,000 to Rs 10,000 to begin the service, which they could have used elsewhere.

Missed Opportunities for Reimbursement

Credit cards with attractive cashback or rewards programs usually require a good credit score for approval. You may only qualify for basic cards with minimal benefits if your score is poor, missing out on the savings that you could enjoy through perks such as fuel cashback, travel discounts, or exclusive deals. 

Career Limitations

In some industries, potential employers check credit scores when hiring, especially for jobs that involve handling money or sensitive information. A bad credit score could jeopardize future opportunities or promotions, and thus indirectly the potential wage.

The Psychological Impact

Though indirectly monetary, the hassles and worries of having to deal with financial constraints due to bad credit weigh heavily as well. This often ends up in costly impulsive decisions or expensive short-term loans just to cover up emergencies.

Bad credit costs much more than just a higher interest rate. It may create a ripple effect across your finances and impact loans, housing, insurance, and even career opportunities. A healthy credit score is not only a financial goal but also a way to protect the future from hidden costs.