Real estate market in India has been reasonably stable despite the pandemic. The banks are also very favourably placed in terms of home loan rate of interest. The only thing that the home buyers need to do is to have a good credit history. In simple words, the banks need to feel safe about the money being lent to you as home loan for you to purchase your dream home. This is where ‘credit scores’ become important.
In this article we shall understand what this means, and what a home buyer needs to do so that you are viewed favourably by the financial institution giving you a home-loan.
Concept of Credit Score
This is basically a numerical score to measure an individual’s creditworthiness. This means ‘ability to repay a loan’. The score in India ranged between 300-900. Reserve Bank of India has given license to 4 companies to measure credit score of individuals- (i) Credit Information Bureau India Limited (CIBIL), (ii) Experian, (iii) Equifax, and (iv) CRIF High Mark.
While applying for a home loan, a lending bank check on your ‘credit score’ to assess whether or not you are capable enough to repaying your loan amount.
Credit score is arrived-at based on all the ‘payment history’ of credit-bills of an individual. A credit score above 750 is considered very good, and helps you get loans at a very low interest rates.
With this background, let us now discuss how you can improve on your credit score.
1. By making timely payment of bills
- Paying your monthly credit bills on time helps improve you credit score
- Prompt payment of bills within the due date helps
- The existing monthly instalments should not have gone into a default
- Avoiding delay on your outstanding credit payments is perhaps more important than showing healthy savings in your bank account
- Of course, by being thrifty, and having higher savings, you also end up getting an impressive credit score
2. By keep credit cards active
- The duration for which you have retained a credit card also helps
- There is no need to cancel extra credit cards that you own
- Instead, it is advisable to keep them active by using them sparingly. For instance, using to pay or recharge your mobile bill, or paying for household necessities. What’s important is to pay them off well within the ‘due-date’
3. Check on your credit report once a year
- Checking your credit report once a year helps you keep a tab on how the scores are progressing
- A free credit report from credit bureaus is available on request
- Remember not to apply for too many loans, and having too frequent hits or enquiries on your credit report
- A credit score in the range of 740 to 799 is considered extremely good. Above 800 it becomes excellent
4. By reducing your fixed payment obligations
- Obligations to Income ratio is an important measure that banks consider. So, having lesser ‘fixed obligations’ releases more disposable income to service a home-loan
- The extent of income also helps. A person who earns Rs 1 lakh per month will have a higher eligibility of loan amount compared to one who earns Rs 40 thousand
- Of course, the amount of disposable income matters. If a person with high income is already burdened with too many existing loan re-payments, the chances for added loan becomes bleak. This is because such an ‘over-leveraged’ individual with too many loans becomes a risk. Excessive loans indicates ‘lack of good financial sobriety’
- Fixed Obligation Income Ration (FOIR) refers to the existing amount of your monthly income which is already being used-up for repayment of existing equated-monthly0instalments.
- This is why decreasing the FOIR improve your credit score, thereby, increasing possibilities getting a loan with higher eligibilities
These tips will go a long way to improve your credit score. These will also allow you to make a wise decision in applying for the ‘right amount and tenure’ of home-loan, and NOT face rejection of your home-loan application.
To quote Maxime Lagacé- “Life can be simple and beautiful. Focus on the good things.”