Our ‘credit score’ is the most crucial indicator of our trustworthiness to home loan lending banks in India. The home loan market operates on a cautious and speculative approach to lending, much like a jeweller assessing the purity of gold. 

Financial institutions are risk-averse and do not want to lend money to borrowers who might default or are not disciplined in managing their finances. A high credit score, like a well-polished gem, signals reliability and trustworthiness to lenders. 

There are 4 credit bureaus operating in India viz. TransUnion CIBIL, Equifax, Experian and CRIF Highmark. They collect and keep a structured record of information for the lenders to use in making their credit related decisions like offering home loans, personal loans etc. 

Credit scores are compiled based on an individual’s credit history, payment behaviour, and borrowing patterns. Credit bureaus provide this information to lending institutions as well as to individuals who wish to know about their own credit history.

Financial institutions use them to evaluate a borrower’s creditworthiness and to make informed lending decisions while granting a loan. 

As borrowers (home loan applicants), we need to realize that credit score cannot be built overnight! Here are some ways we can build the foundation to a great credit score!!

Any home loan provider would like to avoid making costly mistakes they may have made in the past by offering loans to people who are not good on repayments. All these precautions and filters are applied on each applicant while assessing a home loan application from a borrower.

A low credit score usually indicates poor payment history. Lenders don’t want to risk their money with such individuals. Sometimes, low scores happen because people don’t understand how the credit system works.

This is why anyone who wants to own a home with a loan needs to understand credit scores and work to keep a high credit score. For example, making timely payments on credit cards and loans can help maintain a good score, making it easier to get approved for a home loan.

1. How does a High credit score help?

You simply get loans effortlessly with a high credit score. 

With a high credit score you even end up paying a much lower rate of interest compared to those who have a poor credit score. 

With a high credit score, your intent-to-repay diligently and trustworthiness gets established. 

Another advantage is that the lender might even be willing to offer you more loan amount than your seek or expect!

A lender is happier lending money to someone who is known to honour repayments rather than to someone with a poor record of repayments.

Simply put, you not only have better negotiation power, but are also preferred by the lender when you seek to borrow money. 

2. Is paying bills your bills on time is important for good credit scores?

Yes…it is! Not paying what’s due on time harms your credit score. More important, whatever is the ‘minimum amount due’ must be paid. 

We also need to know- there is nothing wrong in revolving on your credit card, but NOT paying the minimum amount due on or before the due date is harmful. While the lenders (credit card issuers) charge a late fee and even interest when you have a revolving credit, the problem comes when ‘minimum due’ is NOT paid. The unpaid dues are reported to credit bureaus, and a trend of not paying hits your credit scores badly.

Sometimes, people are just FORGETFUL and have all the intention of paying back, but end-up DELAYING the payment. They even pay the late fees and interest, but a trend of non-payment is already reported to bureaus like CIBIL, and the damage is done.

So, it is NOT the amount of loan you took that pulls down your credit score. It is actually the non-payment of dues on-time that harms you! 

The worst thing a borrower can do is not pay dues when there is a dispute or disagreement over charges levied by banks, such as late fees, finance charges (interest), or unapproved charges on a credit card. While the reason for disputing these charges might be valid, delaying payment until the bank resolves the issue is a mistake. For example, if you disagree with a late fee, it’s better to pay the fee first and then argue your case. This approach helps maintain a good credit score and avoids further complications. Always remember: Pay first, argue later!

More so, missing a payment for 30 days or more further hits the credit score adversely. 

3. Tracking and paying back your loans on time helps!

Developing a habit of tracking multiple loans running simultaneously is beneficial. For a great credit score, keep a record of all your payments and their due dates. 

For example, using a calendar or a financial app to remind you of upcoming payments can ensure you never miss a due date. Maintaining a consistent repayment schedule helps improve your credit score significantly. 

4. Making micropayments frequently improves credit score

Credit utilisation is another factor that immensely influences your credit score. Credit utilization is the percentage of the total credit being used by you. Banks have a yardstick to measure your credit scores by the utilisation. As per Experts, credit utilization below 30 percent helps build a good credit score. For example, if you have a Rs 3,00,000 available credit, and your outstanding balances are less than Rs 30,000, then you are considered to be a blue-eyed potential customer (borrower).

Frequent payments is a great way to positively impact your credit utilisation. This means with several short and micropayments in a month, you can actually improve your credit scores! 

A habit of CONSTANTLY WATCHING your credit, and making conscious attempt to bring down your outstanding is made evident by these multiple micropayments.

5. Rectifying erroneous credit report is possible

We need to watch out for wrong entries, and highlight any discrepancies to the bureau (CIBIL) to get it rectified. You must not be reluctant or negligent about correcting errors on your credit report!

6. Higher credit limit and use of secured credit card

A higher credit limit helps increase the credit score. The more the credit limit, and lesser the outstanding, the better it is. A high credit limit comes your way with increasing income and a consistent trend of good credit scores.

Another smart to manage a great credit is by opting for a secured credit card. A secured credit card is very safe since it is backed by a cash deposit from the cardholder. This way, you can build your credit scores too.  Secured credit cards can be kept in good standing by paying the monthly bill on time. Banks offering secured cards report the behaviour of their lenders to credit bureaus each month.

7. Strike the right balance of revolving credit and instalment

Credit worthiness and credit scores can be improved with having both revolving credit as well as instalment payments, and managing them efficiently. 

Revolving credit can significantly boost your credit score when used responsibly. To maximize its benefits, always make your minimum payments on time. Whenever possible, pay more than the minimum or pay off your balances in full each month to avoid interest charges. Additionally, aim to keep your credit utilization ratio below 30% to maintain a healthy credit profile.

Closing a credit card is a poor option because by closing a card account, we eliminate the possibility of our credit utilisation behaviour as well. In fact, the credit score further goes down because of lesser credit limit being available to you. The credit limit of each card positively influences your overall credit score.

The crux is to plan your finances well, and with a consciously nurtured discipline!

To quote Alex Von Tobel- “A good financial plan is a road map that shows us exactly how the choices we make today will affect our future.”

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