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Nine assumptions that will harm a home buyer’s credit score written by SUNITA MISHRA, published in Housing.com. May 12, 2020

In this article we bust some of the commonly-held inaccurate beliefs pertaining to credit score and its impact on your home loan borrowing capacity

 

Banks and housing finance companies (HFCs) thoroughly examine the credit profile of the applicant, along with several other factors, before approving any home loan. This scrutiny by financial institutions is likely to grow more rigorous, if the defaults on home loan repayments increase, owing to the impact of the Coronavirus pandemic on individual incomes and businesses.

 

In a scenario like this, wrongly-held notions about your credit score could reduce the chances of buying your dream home, at a time when property prices in most big cities are at a low.

 

&ldquoConversations with our customers over the years, have revealed some extremely grave myths they have about the credit score,&rdquo says Radhika Binani, chief product officer, Paisabazaar.com.

 

In this article we bust some of the commonly-held, inaccurate beliefs pertaining to the credit score and its impact on your home loan borrowing capacity.

 

What is a credit score?

 

Credit scores are assigned by credit bureaus to borrowers in India, based on the latter&rsquos banking/payment history, on a scale of 300 to 900. Banks offer home loans easily to borrowers with credit scores of 700 and above. Borrowers with poor credit scores have to pay a higher interest rate.

 

1. Staying off credit is good

 

Thinking that banks will be impressed by the fact that you have never depended on credit to meet any of your financial needs, is ill-founded. In the total absence of a credit history, banks will have to go through a more rigorous scrutiny process, to figure out your credit-worthiness and repayment capacity. Hence, they will be more cautious, while examining your home loan application.

 

2. I can quickly improve my credit score

 

Since you know that the absence of a credit history is actually a bad idea, you may be tempted to quickly apply for credit cards and small loans, to create a history. This would be a bad idea, because such attempts make it obvious to the credit institutions that you are trying to hurriedly create a credit history, to get a huge loan subsequently. This would also reflect poorly on your credit score.

 

3. It is okay to touch the upper limit on your credit

 

Among the facts based on which your credit score is prepared, is how much of your available credit you are using. Your payment history, loan amount, length of credit history and credit mix, are other key factors. Maxing out the credit limit sanctioned on credit cards, pushes up the credit utilisation ratio (the ratio of your outstanding credit card balance to your credit card limit). In simple terms, credit utilisation shows the amount of available credit a borrower is using. The lower the ratio, the better.

 

Suppose your balance is Rs 20,000 and your credit limit is Rs 50,000, the credit utilisation for your credit card is 40%. Now, a move that increases your repayment obligations would hurt your credit score.

 

4. Being a guarantor to a loan is fine

 

A friend or a relative may have asked you to be a guarantor, in his loan application and you may have agreed, considering it to be a harmless request. However, this impacts your own credit worthiness in two ways:

 

  1. If the friend defaults on his loan, you are legally obliged to meet the liabilities.
  2. Your own borrowing limit might be constricted by the outstanding loans for which you are a guarantor.

 

5. My credit report is up-to-date

 

On full repayment of a loan, the bank, which lent the money to you, will provide you with a clearance report immediately. However, it may take around 30 to 60 days for this information to be shared with the credit bureaus, who actually prepare your credit score. The changes in your credit balance would reflect on your credit score, in due time and not immediately.

 

&ldquoEveryone needs to check and track their credit scores, at least once every three months, even if you do not need a loan in the foreseeable future. This is because crisis and uncertainty can strike anytime and you may need to take a loan,&rdquo says Binani. Credit reports may also contain wrong information, fed erroneously by the lender or due to clerical errors on the credit bureau&rsquos part. &ldquoThese errors can adversely affect one&rsquos credit score and thereby, his future credit card and loan eligibility. The only way to detect such errors, is to fetch the credit report at regular intervals and report inaccuracies, if any, to the bureaus for rectification,&rdquo she adds.

 

6. Delays are fine, as long as I pay the EMI

 

Credit bureaus do not assign ratings, only on the basis of whether or not you have been able to repay your loans. They are in fact more interested in gauging how diligently you do that job. Delayed credit card payments and EMI defaults, will convince them of a lack of financial discipline on your part, even if you ultimately repay the loan.

 

7. I should close old accounts

 

As credit cards are considered unsecured loans, some of you may hurry to close an old account, with the notion that it would reflect positively on your credit score. This might, in fact, have the opposite effect on your credit rating. An old credit card account with a good repayment history, would help your prospects as a borrower. Since credit bureaus also factor in the length of your credit history while assigning you a rating, an active old credit card account, would only be helpful towards building your credit worthiness.

 

8. Settled loans do not find a mention in my records

 

Each and every financial transaction has a mention in your credit history. These include the number of times you might have called a bank, to enquire about home loans or credit cards.

 

9. A bad credit score is permanent

 

A bad credit report today could be completely turned into a good one by the borrower, by way of adopting financial discipline. Pay your bills on time, pay off your debt, do not apply for too much credit in a short span and check out your credit score regularly, to get any errors in your credit report corrected. By doing so, in good time, you can completely transform a bad credit score into a good one.

 

  • Cash reserves in your account have no bearing on your credit score.

 

  • Debit cards do not a ect the credit history but closing a credit card can hurt one's credit score.

 

  • Your income is never included on credit reports.

 

  • Checking your credit doesn't hurt your score.

 

  • You and your spouse will have different credit scores Similarly, each person can have multiple credit scores from different rating agencies.

 

  • You can dispute the information shown in your credit report.

 

  • Credit scores shown to you and banks may not be the same.

 

How to improve your credit score for a home loan

By Content Consultants

 

Improving one&rsquos credit score has many advantages. Not only does it make it easier to obtain a loan, but it can also help the applicant to get an attractive rate of interest

 

August 4, 2018: It is advisable for home loan seekers to obtain a credit report, before applying for a large loan, such as a home loan. This report, which provides a person&rsquos credit score, can be obtained from any one of the four credit bureaus operating in the country &ndash CIBIL, Experian, Equifax and Crif High Mark. A score between 750 and 900 is considered as excellent. However, if the score is below 675, one may need to improve the credit score before applying for a home loan.

 

&ldquoA good credit score can help you get a loan at a more attractive rate of interest. This can lower your interest burden by lakhs of rupees, during a loan tenure of 15-20 years,&rdquo asserts Sujit Kumar, a Delhi NCR-based lawyer, who improved his credit score, before applying for a home loan.

 

Immediate tips to improve your credit score

 

When it comes to improving your credit score, first check for any error in your lender&rsquos record books. While you may have repaid a loan, the bank&rsquos records may still be showing some credit outstanding against your name. Rectifying such mistakes, will improve your credit score.

 

Disagreements between a lender and a borrower may also be the cause of a poor credit score. Resolving such disagreements, paying the dues and closing the loan account can boost your score.

 

The most important thing for a good credit score, is to make all the payments on time. If you have missed a particular payment, make amends right away by paying up.

 

Consolidating your credit will also help. You may have taken five personal loans. Consolidating all these loans, into a single one, will look better on your records, by indicating that you are not excessively credit-hungry.

 

Also, when it comes to credit card bills, many borrowers pay up only the minimum amount and revolve the rest of their credit card loan. This is a bad practice, as the rate of interest on credit card loans is very high. If you have been doing so, replace the credit card loan with a personal loan, which will bring down your interest charges and enable you to meet your dues.

 

Long-term tips to improve your credit score

 

In case you have a delinquent loan against your name and you don&rsquot have the ability to repay right away this is a situation that can only be remedied over a period of time. If you have a high proportion of unsecured loans, vis-à-vis secured loans, you should try to alter the mix over a period of time.

 

Another behavioural change that you must make, is to avoid shopping for loans excessively. In trying to bag the best possible deal, do not apply or make enquiries at 15-20 banks. Each time you make an enquiry, it gets registered against your name and indicates that you are credit-hungry.

 

&ldquoIf a person is too hungry for credit, it reflects poorly on his credit score,&rdquo cautions Arun Ramamurthy, director, Credit Sudhaar Services.

 

Suppose that your credit card provides you with a credit limit up to Rs 2 lakh, don&rsquot use up the entire limit as this is also perceived as a sign of credit hunger.

 

Despite your best efforts, if you are not able to achieve a good credit score on your own, then, there are professional agencies that you can turn to, such as Credit Sudhaar, etc. These agencies can help you to achieve the right mix of secured and unsecured loans. They tell you about the right number of credit cards you should own, given your economic status. They also inform you about the maximum percentage of credit on your credit card, beyond which you should not go.

 

 

FAQs

 

What is a credit score?

Credit scores are assigned by credit bureaus to borrowers in India, based on the latter&rsquos banking/payment history, on a scale of 300 to 900.

 

What is a good credit score?

Banks easily offer home loans to borrowers with credit scores of 700 and above. Borrowers with poor credit scores have to pay a higher interest rate.

 

Who offers credit score in India?

You can get your credit report from any of the four credit information bureaus - CIBIL, Equifax, CRIF High Mark, or Experian.

 

Would my score be affected if I check my credit score?

Your credit score will remain unaffected when you check the same.