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Credit Score is an indicator of your creditworthiness. It is issued in a range of 300-900 with higher number indicating higher grade of creditworthiness. Credit score is calculated taking into factors from your prior credit engagement like number of loan accounts, promptness in payments, credit mix, number of hard inquiries and the credit utilization ratio.
In India, Credit Score is offered by credit bureaus and currently, there are 4 bureaus namely CIBILTM TransUnion, Experian, Equifax, and CRIF High Mark. Each of your lender is mandated by law to report all transactions pertaining to your credit account to the credit bureau. Based on the information reported, the bureaus calculate your credit score.
What is the importance of a credit score?
Your credit score is not a static figure; it can change based on each of your transactions like payments, missed payments or closure of accounts.
When you seek credit from any lender, they would want to make sure that you can repay the debt on time with interest. Your income and other factors like other loans and commitments, etc are given importance. However, the lender will not know how likely you are to pay back the loan based on your income and employment details.
Your credit score, reflecting your past credit behaviour, is the only indicator that can help lenders decide if you are worthy of the credit you have applied for. And with a low credit score, it is clear to the lender that you did not act responsibly with your earlier credit, hence decreasing your chances of getting approval on your loan.
With that information in the background, we got our in-house credit improvement experts to answer some questions that we frequently receive on our forum regarding the availability of loans with low credit scores of 550 or below.
Can I get a loan with a credit score of 550?
Your credit score shows the lender how well you have handled credit in the past. A score of 550 is not very great and it portrays that you have unfortunately committed some mistakes while handling your credit and hence landed up with a low score.
It is difficult to get a loan with a credit score of 550. Most banks look for a minimum score of 750 when deciding whether to approve a loan application. If your score is less than 750, it is very important to increase your score before applying for a credit card/loan.
You wouldn't want to pull your score further down by applying for loans before getting your score up. This happens as each fresh inquiry for a loan/credit card from a lender is considered a hard inquiry. The more the number of recent hard inquiries, the lower your credit score goes. So, if you are in urgent need of a loan, try approaching other short-term lenders who lend to those with low/no credit scores.
Additional Reading: Can I get a loan with a credit score of 600?
My Credit Score Is 550. How Can I Improve It?
We are very glad that you are looking to improve your credit score. We believe that a good credit score is an asset that can open the doors of credit for you on favourable terms.
Your first step should be to check your credit score here. Along with your credit score, you also get to see how you are performing on various factors that count towards your credit score. You could study these factors and identify the reasons for your low score.
The reasons for low credit score could be anyone or a combination of the following factors.
- Late or missed payments
- Reporting errors
- Unhealthy credit mix
- A bad credit utilization ratio
- Increased number of recent hard inquiries
If the credit report format is too technical or it seems difficult to understand or you do not have the time to analyse it, you could turn to a professional credit management company like CreditMantri, to help you increase your score.
We offer you Credit Improvement Service through which we guide you to a better credit score.
Additional Reading: How To Get Into the above 800 Credit Score Club?
What are the disadvantages of applying for a loan with a credit score of 550?
We understand your situation: sometimes the need for credit is immediate and you might decide to go ahead and take a chance applying for a loan with a credit score of 550.
But there are certain disadvantages of applying for a loan with a low credit score.
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Chance of rejection
Lenders have every right to reject those applications that do not make the cut on credit score. With every rejection, your score will drop further. So instead of benefitting, you might be ruining your chances of further credit availability. -
Higher interest rate
Your loan application may be approved but with a higher rate of interest to compensate for your lower credit score. This can be an unnecessary financial burden that you would have to bear all through the tenure of the loan and will also increase your chance of defaulting on payments.
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Lower credit limit
With a score of 550, lenders can approve your loan but will cut down on the amount of credit. For Ex: When you require a loan of Rs. 1,00,000, you may just be approved around Rs. 50,000-Rs. 60,000 just because of your credit score. This might put you in a situation where you would look to meet the credit requirement through another loan.
All these disadvantages will have a negative and long-term impact on your credit score. Therefore, it is advisable to improve your score to 750 before applying for a credit card/loan. You could contact a professional credit management company like CreditMantri, to guide you on how to improve your score so that you can have faster and easier access to credit.
FAQs
1. Is the credit score always checked for sanction of any loan?
Yes, The credit score is the first point of reference while reviewing any loan application.
2. Will a personal loan be easily sanctioned?
Yes, a borrower can get the sanction of a personal loan easily as compared to any other loan like a home loan or education loan.
3. How can a person increase their credit score?
There are many ways a person can increase their credit score. Some of such measures are mentioned below.
- Pay credit card dues and loan EMI is on time.
- maintain credit utilization ratio up to a maximum of 50% of the total credit limit.
- Correct any error on the credit report.
- Do not close any old credit cards.
- Avoid frequent applications for new credit cards or loans.