A good credit score is extremely important while applying for a home loan. It reflects that you are creditworthy and can be trusted for giving credit. Let us look at the factors that make it so crucial.
Helps lenders to check credit history or behaviour
It’s a big risk for the lender, mainly banks or NBFCs if they lend a loan without doing a background check for the borrower. They want to look at something substantial that proves the borrowers’ credit behaviour.
Credit scores have been a reliable parameter to assess the creditworthiness of an applicant. Looking at previous credit history, timely previous payments, no defaults etc helps lenders decide if they want to approve the loan, how much they want to approve and what offers they want to provide.
Repayment capacity
A credit score is given to an individual after careful study done by credit bureaus based on data given by banks and financial institutions. It’s a three-digit number that is a summary of your credit history.
Since it is backed by previous data, it’s widely used by lenders to measure the repayment capacity of the borrower. A credit score of 750 or more is a good measure of a borrower’s capacity to make timely payments and hence it can accelerate the time taken to approve a loan.
Knowledge about other ongoing financial liabilities
At the time of applying for a home loan, if there are other liabilities on your account, it can be considered risky by lenders. It means that you will have other payments to be made while paying for the home loan itself. Lenders like to do more analysis in this case.
A good check is to look at loan to value ratio. It is calculated by dividing the amount borrowed by the total value of the property. Put in simple words, it is to check what percentage of your total payment you are borrowing. A loan-to-value ratio of 80% or less is considered less risky.
The lenders also like to look at your total income and payments like credit cards, EMIs etc. to assess how much liquidity you have to pay the loan installments.
Determining interest rates
A good credit score can get you a better interest rate as well. Lenders prefer timely payments to big irregular payments. A good credit score helps to establish credibility giving assurance to the lender that payments will be made on time and regularly.
Determining the amount of the loan
Again, based on your credit score, lenders will decide how much they want to loan you. A good credit score can ensure that you get a bigger loan and can get it approved faster. The lender is comfortable giving a bigger amount to an applicant with a credit score of 750 and above.
Determining the tenure of the loan
A good credit score helps lenders determine the tenure of the loan. A good credit score can help you get a longer-term loan with better interest rates.
So, let’s look at how you can maintain a healthy credit score and how it can be improved.
A credit score is a 3-digit number that establishes a person’s creditworthiness. A credit score of 750 and above is a good indicator of a healthy credit history. Let’s look at the below table that explains the credit scores and their relevance.
| CIBILTM Score | What it means |
| 750-900 | 1) The best score you can get |
| 2) Makes the applicant highly creditworthy | |
| 3) Measure of good credit history | |
| 4) Attracts lenders | |
| 5) Lenders will give attractive interest rates | |
| 700-750 | 1) Good score |
| 2) Attractive creditworthiness | |
| 3) Respectable credit history | |
| 4) Almost all lenders available | |
| 550-750 | 1) Lower score |
| 2) Not all lenders are available | |
| 3) Will not get attractive offers or interest rates | |
| 4) Need improvement in the profile | |
| Less than 550 | 1) Poor score |
| 2) Most lenders are unavailable | |
| 3) Needs to improve the score to obtain any loan |
So how do you make sure your credit score is in a healthy range? Might sound like a daunting task but a few easy steps and discipline can make sure your credit score is always top-notch.
How to maintain a healthy credit score
- Step 1 to maintaining a healthy credit score is to check it regularly. You will not know what your credit score is if you don’t check it
- Step 2 is to make sure the report is free of any errors or incorrect information. If you find any, get it corrected as soon as possible as it can affect your credit score. Raise a dispute with one of the credit bureaus and follow up for quick resolution.
- Pay your credit card bills and EMIs on time. This information will consistently improve your credit score as it shows financial discipline.
- Keep your credit utilization rate low. Avoid unnecessary expenditure. It shows lesser liability on your account and better credibility for your credit score. Ideally, the credit utilization rate should be under 30%.
- Keep your old debt on your records. Timely payment of old debt works positively for your credit score. And keeping it on record helps lenders check your credit health.
- Be honest about your credit situation and try to improve it over a period of time. Do not overcomplicate things. People value honesty. Your credit score can be improved over some time but a ruined image can never be recovered.
Conclusion
If you follow the above recommendations, you will enjoy a good credit score enabling you to approach the best of lenders. Having a good credit score is not only important for your financial health but also the general well-being of you and your family.
Having a disciplined approach can help you fulfil the dreams of you and your loved ones. It also makes sure you can avoid those panic attacks and emergencies. Slowly but surely, you can make it possible to live the dream life that you always imagined. So, plan well, execute effectively and approach smartly! Rest assured lenders would want to offer you the most lucrative loan with offers and attractive interest rates!