Vicky and John worked in the same office with the same pay package. They decided to take a home loan to buy identical flats in a posh locality. After some research, they chose a lender and applied for a home loan of Rs 30 lakhs. When they contacted the lender with the loan application, the lender approved their loan application but at a different rate of interest.
While Vicky was given a home loan at an interest rate of 7%, John’s loan was approved at a much higher rate of 10%. Confused with the difference in the rates, when they approached the lender, they were informed that this has been done considering the credit score of both the borrowers. While Vicky had a credit score of 830; John’s credit score was only 660, though John’s application was approved, he had to accept the loan offer at a much higher interest rate.
Your credit score is an important eligibility criterion that lenders consider while processing a home loan application. While it determines the chances of loan approval, it can also affect your housing loan’s interest rates. Let’s see how.
What is a credit score?
A credit score is the numerical representation of your creditworthiness. It is calculated basis your credit behavior in the recent past. The score ranges between 300-900, with 300 being the lowest and 900, the highest. Score equal to or above 650 is considered good enough to be eligible for a home loan. However, it is not necessary that a score of 650 or 700 will result in the approval of the loan.
If your credit score is poor, or just close to the cut-off of 650, the lender can straightaway reject your loan application. However, if you fulfil other such as age limit, work experience for salaried applicants, minimum salary, your loan could be approved, but at a higher home loan interest rate.
It is because, with a good credit score, the lender considers you to be a reliable borrower who can manage their debt effectively and is not likely to default on EMI and loan repayment. The lenders consider you capable of repaying the loan on time. In other words, they feel assured that your loan would not turn into an NPA (non-performing asset).
A credit score also popularly referred to as CIBIL score is given by credit rating agencies who have access to your complete borrowing related data from all financial institutions. The credit score is calculated considering your past debt history that includes credit card debt, past loan applications and/or rejections, the total number of accounts opened, repayment history, etc.
How does credit score impact your home loan?
While processing your loan, lenders look at your eligibility criteria and approve your loan only when you are eligible. If you are unable to fulfil any of the criteria, lenders can reject your loan application. A credit score is one of the most important home loan eligibility criteria. If lenders doubt your creditworthiness due to the poor credit score, they offer you an interest rate at a higher rate than usual to safeguard their money.
Therefore, it is advisable to apply for a loan only when you have a good credit score to get your loan approved at a competitive interest rate. At the same time, if you are likely to apply for a loan in the near future, it is a good practice to monitor and improve your credit score before actually applying for the loan.
How to improve credit score?
Here are a few tips that can help you improve your credit score.
- Always pay your credit card outstanding balance on time. A default in credit card bill payment adversely affects your credit score.
- Check your credit report for mistakes and take steps to rectify them on time.
- Pay your EMIs on time.
- Avoid taking multiple debts at a time.
- Avoid making too many loan applications.
- Do not remove old debt accounts from the report.
- Keep the debt utilization ratio below 50%, especially for credit cards
- Plan your loans effectively and never borrow more than your repaying capacity
