Credit Scores Can Make or Break Your Home Loan Chances

What is credit score?

In its simplest form, Credit Score (also called Credit Rating) is the assessment of a borrower by a registered credit rating agency. The credit score, usually a number between 300-900, determines a borrower’s credit-worthiness and ability to meet debt obligations. On the other hand, credit rating does the same for a business, an organisation, NGO or even a government that seeks to borrow.

A credit rating agency prepares a credit score on the basis of a variety of factors, the most important of which is payment history – did the borrower pay back debts and bills on time? Another factor is credit utilisation ratio, which looks at how much of available credit you are using. For example, how much of the available limit on a credit card is actually utilised by the card user.

Other factors include amount of debt, type of debt, age of history and the number of credit inquiries (requests by an institution for a credit report from a credit rating agency usually when an individual applies for a loan).

Each of these factors contribute to improving or degrading your credit score. A higher score obviously makes it easier to borrow and a lower score makes it difficult, and in some cases, even impossible to borrow from a financial institution.

What is the importance of credit score?

A good credit score improves the borrower’s credibility. There are tangible effects of a borrower’s credibility because credit ratings directly influence a bank or financial institution’s decision of approving a loan.

For borrowers, a good credit score automatically translates into less or no hassle when seeking a loan.

What can I do to improve my credit score?

For your information, a credit score of 300-459 indicates poor credit-worthiness while a score between 650-749 is a healthy score. A credit score between 750-900 is good to excellent according to CIBIL, the credit rating agency that most banks prefer to rely upon for credit scores of individuals.

Before understanding what improves a credit score, let’s understand what does not. Missing or delaying payments is one of the biggest factors affecting credit score. Make sure you never miss or delay a payment, be it credit card or an EMI for a personal, auto or home loan. In addition, managing other factors explained below will help you achieve a higher credit score.

It’s never a good practice to utilise your entire credit limit. Lenders prefer approving loans of borrowers who utilise no more than 30% of credit limit. For instance, if your credit card limit is Rs 1 lakh, try to limit spending to 30,000 in any billing cycle.

Also make sure you don’t have outstanding loans when applying for a new loan. It shows the lender that you repay debts on time even if you borrow frequently, and it increases your eligibility amount.

Can a good credit score improve my prospects for getting a home loan?

A high credit score automatically indicates to the lender that you are a no or low risk borrower, meaning it’s easier for banks to approve your loan application.

In addition to helping your loan prospects, a higher credit score also makes it easier to get the most competitive interest rates. A good credit score is one of the factors that determines the rate of interest on your loan. You can negotiate with your bank for a lower rate of interest on account of your high credit score.

The credit score currently required for home loan in India is 750 and above. It’s worth noting that banks can be rigid about approving loans only to borrowers who can achieve this score. Housing finance companies may take a softer view of credit scores, approving loans for borrowers scoring between 600-750. Such loans, however, come with the trade-off of a higher interest rate.

In closing, you may not comprehend the gravity of how mishandling your debts or spending excessively can affect your credit score until you apply for a loan. Be aware of this and form a habit of taking fiscally wise decisions in the present to secure a fiscally stable future.

If you have a good credit score and you’re looking to buy a home, explore our Home Loan service or get in touch with us to get the best home loan deal for you.