SYNOPSIS

A credit score is a numeric indicator of the customer’s creditworthiness and is an important parameter for availing a home loan.

A good credit score helps –

get a home loan with ease
get a higher loan amount
improve your negotiation power

Get a good credit score by –

repaying your loans on time
avoiding excessive use of credit
prepaying loans with surplus funds
avoiding multiple loan enquiries

A home loan is an important step to building a personal asset – your home. At the same time, it needs a commitment to repay the loan within the stipulated time. It is thus very important for lenders to assess your repayment capacity, which is mainly judged on the basis of your earnings, age, expenses, savings, work profile, financial capability and repayment history of loans and other dues. The last factor – repayment history – is a critical indicator of your loan servicing discipline. While earnings and financial capability indicate your home loan eligibility, repayment history reflects your intent and willingness towards repayment of housing loan.

There are several banks and financial institutions in the country. It’s possible that a customer who has a clean repayment track record with a particular lender (say Bank X) has defaulted on loans advanced by another lender (Bank Y). In such a case, Bank X may not have a true idea of the customer’s tendency to default. It may also happen that a loan applicant may not have borrowed from a particular lender in the past, in which case, the lender may find it difficult to assess the applicant’s repayment history. Given such challenges, leading banks and financial institutions have collaborated to share information on the repayment track record of customers with respect to loans and other dues. The information is collected and maintained by credit bureaus (such as CIBIL and Equifax).

A credit bureau is like a library for the lenders. It maintains detailed records of an individual’s loans and repayment history. This information is processed to create a credit score for each customer.

understanding Credit Score

A credit score is a numeric indicator of the creditworthiness of a customer. It tells us how likely the customer is to repay the loan on time. A credit score is largely evaluated on the basis of:

Repayment history.
Credit utilization level.
Level of indebtedness.

A high credit score indicates that the customer can comfortably repay the home loan. Credit bureaus assign credit scores in the range of 300-900. While various lenders have different standards, scores in the range of 700-750 are generally regarded as fairly good and scores above 750 are considered to be excellent. When you apply for home loan, your chances to get your home loan approved are quite high if your credit score is above 700.

Benefits of a Good Credit Score

Higher chances of approval:

With a good credit score, the chances of loan approval are higher. This is because the lenders derive comfort on your ability and willingness to repay loans. In such cases, you can also expect quick processing of your home loan application.

Enhanced borrowing ability:

A high credit score enhances your loan eligibility, thereby enabling you to avail a slightly larger loan amount in case you require it.

Better negotiation power:

A healthy credit score also gives you better negotiation power. You can thus expect lower interest rates and waiver of processing fees and other charges.

Mistakes Which Can Spoil Your Credit Score

A credit score creates the first impression of a customer. It is thus essential for you to have a good credit profile and credit score which can be maintained by avoiding:

Delays or default in repayment of loans

Timely repayment is the basic element of borrowing discipline. Therefore, late payments or default in repayment of loans will have an adverse impact on your credit score. Credit bureaus consider the payment history associated with a variety of loans and dues such as:

Bank loans
Car loans
Housing loan
Credit card bills
Utility bills and other dues (telephone bills, electricity bills, insurance premiums etc.)

High utilization of borrowed funds

Heavy debt and excessive dependence on borrowed funds reflects poor financial health, which creates a negative impact on your credit score.

Frequent applications for loans

Your credit score is also affected by multiple enquires and applications for loans, which increases credit risk and lowers your overall credit rating. In such cases, lenders may become increasingly cautious while processing your loan application.

Improving your Credit Score

You can always improve your credit score by:

Repaying your dues on time.
Avoiding excessive use of credit; taking fewer loans and credit cards.
Prepaying loans with surplus funds.
Avoiding multiple enquiries for loans and credit cards.

You need to monitor your credit history periodically. For this, you can obtain a credit score from CIBIL or Equifax for a nominal fee (for more information on the same, visit: www.cibil.com / www.equifax.co.in).

upshot

A good credit score is an important parameter which separates disciplined customers from the rest. It is an indicator of the customer’s ability and willingness to make repayments on time. Your credit score is compiled on the basis of comprehensive information related to your loan repayment history, credit utilization level and financial capability.

Almost all lenders refer to the credit information report and credit scores provided by credit bureaus before approving loans. The higher the credit score, the better are the chances of loan approval. As a customer, you can improve your credit score by making timely repayment of dues and avoiding excessive use of credit. Before you apply for a home loan, you can check your credit score and initiate remedial measures if necessary.