A borrower's credit score is crucial and yet many credit users go about life completely unaware of the concept of credit scores. Some who understand the concept never feel the need to check their CIBIL score. So, what is CIBIL score and why is it important when you avail of a home loan?
When a credit user applies for credit, they essentially ask a lender to trust their repayment capacity and lend them money. Lenders cannot trust credit users blindly, especially in the case of big-ticket loans, such as home loans, when the lender must sanction a sizeable loan sanction. This is where the concept of credit score becomes important.
The credit score is a three-digit number that reflects a borrower's credit history and repayment behaviour. There is a direct co-relation between credit scores and a person's repayment capacity and creditworthiness. A high credit score indicates high repayment capacity and excellent creditworthiness. A low CIBIL score, on the other hand, raises doubts regarding the borrower's ability to repay loan money on time. Anything above 750 is considered a good CIBIL score for a home loan. Does a borrower's CIBIL score also impact the home loan interest rates they get offered? Read on to know the connection between credit scores and home loan interest rates.
How Does Your Credit Score Impact Your Home Loan Interest Rates?
If you are planning to apply for a home loan, one of the first things your lender will do is check your CIBIL score and here's what your CIBIL score will tell them about you.
A CIBIL score of 750 or above signifies a borrower's who has always paid loan EMIs and credit card bills. Such a credit score also suggests that the borrower has their debt situation under control and are not excessively dependent on credit. Borrowers with such a CIBIL score not only get approved for a home loan quite quickly but they also have high negotiating power over lenders and are able to negotiate for a low interest rate. In the case of home loans, a low interest rate is crucial as it helps borrowers keep their EMIs affordable and the cost of borrowing the loan as low as possible.
Borrowers whose credit score is between 700 and 750 make reliable borrowers. However, they have made a few mistakes in the past, such as missing EMI due dates or having a high credit utilization ratio, etc. These mistakes raise some concerns and therefore, lenders do not trust such borrowers blindly. Borrowers or credit users whose CIBIL score varies between 700 and 749 enjoy quick approval on their home loan but often find it difficult to negotiate for a low home loan interest rate.
Lenders have reasons to doubt the repayment capacity of borrowers whose credit score falls below 699 and therefore, approval does not come easy for these borrowers and borrowers whose credit score falls below 600 can forget all about availing of a home loan in near future. Such borrowers must work on improving their credit score first and then apply for a loan.
Borrowers planning to avail of a home loan must go ahead with the loan application process only if their CIBIL score is at least 750. Those whose CIBIL score is below 750 can follow the tips below to improve their CIBIL score.
Simple Tips on How to Improve CIBIL Score
1. Maintain a Clean Repayment History
A borrower's repayment history is the most important factor that affects their CIBIL score. A clean repayment history inevitably leads to a good CIBIL score. Maintaining a clean repayment history is easy -- simply pay all your credit card bills and loan EMIs on time and your credit score will automatically improve over time, if it is below 750.
2. Keep Your Credit Utilization Ratio Low
A borrower's credit utilization ratio makes up almost 35% of their credit score. Your credit utilization ratio tells your lender what percentage of your monthly income is going towards covering your EMIs, credit card bills and other fixed obligations. A high credit utilization ratio indicates excessive dependency on credit. Thus, borrowers whose credit utilization ratio is higher than 30% find it difficult to get approved for a loan. To increase your home loan eligibility and chances of availing of a loan at low home loan interest rates, maintain a low credit utilization ratio by paying your credit card bill every month and not just the minimum amount due and using your credit card cautiously.
3. Apply for Credit Only When You Need it
Too many credit card and loan applications are a sign of a borrower who is excessively dependent on credit. Thus, too many credit card and loan applications, especially when made over a small period, raise red flags and bring down a borrower's CIBIL score. If you wish for you to have a good credit score, apply for credit only when you need it. Further, maintain ample gap between your loan applications.
4. Never Close Old Loan Accounts
The length of your credit history also has a direct impact on your credit score. The longer your credit history, the better your credit score. This is the reason why borrowers are advised to never close off old loan accounts. The same goes for your old credit cards.
5. Check Your Credit Report from Time to Time
A borrower's credit report is a digital representation of their credit history. The credit report also contains other important details, such as the credit user's name, phone number, details of all the credit cards and loans they have, loans they have paid off and loans that are still going on, EMIs missed, EMIs paid, etc. Sometimes a borrower's credit score goes down due to wrong information passed on to them by credit companies. This misinformation sometimes translates into low credit scores. Borrowers must check their credit report once every short while and make sure there are no errors in it that are bringing down their credit score.
Final Words
Those planning to apply for a home loan must check their CIBIL score at least a few months before beginning the home loan process. This way, even if the applicant has a low credit score, they will get ample time to improve it and avail themselves of the lowest home loan interest rates possible. A low home loan interest rate will help you bring down the cost of borrowing the loan and so will home loan tax benefits. So, make sure to also make yourself well-aware of the various home loan tax benefits available to you and use them to your best advantage. Further, remember to also use a home loan EMI calculator to figure out the loan amount you can borrow and easily repay to make your home loan journey as simple and stress-free as possible.
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