Bhavya, a software engineer from Bangalore, earning Rs.1 lakh a month for the last 1 year had her home loan application rejected! She was all set to buy this place on Old Madras Road but the bank rejected her home loan – everyone thought it was a done deal for Bhavya considering her salary. So why did the bank reject Bhavya’s loan? She had a low credit score and poor credit history. A couple of unpaid credit cards from her carefree shopaholic days were catching up to her now.
So, income is not the only criterion for salaried employees to be eligible for loan?
Credit score is the first and foremost important criteria in determining if an applicant is eligible for obtaining loan from the bank or any financial institution.
What is credit score?
A credit score reflects the financial health of an individual and is represented numerically. Credit score is calculated by credit bureaus in India. TransUnion CIBIL, Experian Credit Information Company, High Mark Credit Information Service, and, Equifax. Out of these CIBIL score calculated by TransUnion CIBIL is the commonly used benchmark for credit by the banks and lending institutions of India.
An individual’s credit score is calculated and starts building once he/she begins usage of credit card issued by a bank or borrows from a lender.
What is a good credit score?
Credit score falls in the range of 300-900. The higher the credit score, the higher your likelihood of having a loan approved and vice versa.
Non-banking finance companies (NBFC) and banks consider a credit score of or above 750 to be a good score to approve loans, advances and credits. 700 works sometimes, and 650 almost never. Here are some loans for you if your credit score is below 700.
If you do not have a credit score yet since you haven’t used credit, you should start building a credit history as soon as possible. A credit score of NH is as bad as a score below 600. An easy way to do that is to get a credit card issued by the bank in which your account exists and use it for small expenses. Keep note of the date by which you will have to pay back the credit and pay it back to the bank on or before the deadline.
Credit score in the range of 500-600
If your credit score falls between 500-600, banks do not approve loans of large amounts. Even if you do get a loan sanctioned, it would be of a high rate of interest and low principal amount than what you originally apply for. This makes it all the more important for you to work on increasing your scores.
Credit score in the range of 600-750
This is the grey area or the twilight zone for a credit score – it could mean anything – like maybe the applicant had a bad history and is trying to fix it, or has a good history and is behind on a few payments – for this reason, the lender takes the “Full CIBIL Report” which lists a chronological history of the applicant’s behavior with credit products. When applying for a loan with a CIBIL score between 600-750, remember to negotiate, have backup assets to keep as collateral (or a co-applicant), and don’t expect a low interest rate.
Credit score of 750 and above
If your credit score falls above 750 points, lenders would easily approve your home loan. Having your credit score to 750 is no reason to not aim to bring it to 900. The higher your credit score, the more benefits you enjoy. You can negotiate for lower interest rates for your loans and repayment terms that are convenient for you.
3 Ways in which CIBIL Scores Affect Home Loans
These are the three most important ways in which your credit score affects the home loan you apply for:
Frequent loan applications to avail loan
When you go about enquiring for home loan from different banks, they pull up your credit report to check your credit standing. Once they are satisfied, they would let you know the loan amount that they can sanction for your home loan application. Every time your CIBIL score is pulled up, it reduces a certain number of points.
An easy way out is to compare the home loan plans offered by different banks and zero-down on the 2-3 home loan offerings that will suit you best. Then, contact only those banks to find out the loan amount they are willing to lend you. Also, make sure you have a few good weeks’ time gap in between contacting each bank so you have time to increase the score after your report is pulled up every time.
If the bank wants to make an enquiry – remember to tell them to make a “soft” inquiry and not a “hard” inquiry.
Outstanding credit payments is one of the most common reasons for a low CIBIL score. Check for your credit card bills and clear the outstanding payments to increase your credit score.
Errors on credit report
Every time banks or any other institution adds a record to your credit check, it reduces your credit score. It is a good practice to check your credit report from time to time and find out if there are any errors. Once you spot an error, contact the relevant professionals to correct it immediately. Errors on credit report are common and it is up to the individuals to monitor it and maintain a high score.
Home loans are of huge amounts and long tenures. Deciding on the right home loan plan can be daunting with low credit scores. So, make sure you work on your scores and increase them before applying for a home loan. The higher your CIBIL score, the lower the rate of interest for your home loan. Feel free to reach out to us to compare home loan plans and decide on the best plan for you.