What is Credit Score and How does it affect Home Loans?

Buying a house is an aspiration that often tops the list for most Indians. However, with the skyrocketing property prices in most cities, buying a house in Chennai can be an expensive affair for many. This is where home loans come in. Banks and NBFC have launched a number of home loan schemes at competitive rates and tax benefits, which is the reason why availing home loan not only becomes a need but also a wise choice. As a result of attractive interests and various tax exemptions, demand for home loans has increased by leaps and bounds. In that direction, the ‘one’ aspect that plays a vital role in getting a home loan is credit score.

What is a Credit Score?

Whether for a business loan or a loan for home, credit score in India is provided by CIBIL (Credit Information Bureau (India) Limited) which is an ISO 27001:2005 company. CIBIL keeps records of credit related information of individuals as submitted by registered member institutions.

In simple terms, credit score is a three-digit summary of your credit history. Normally, an individual’s credit score ranges between 300 and 900, and is based on his/her credit history. This will include all secured and/or unsecured loans and any other debts that these individual may have or had.

For availing a home loan, credit score can be obtained from CIBIL for a nominal fee. A credit score report will include the following information.

1. Record of credit availed by you.

2. Record of loan repayment and credit card bills.

3. Late payments and/or defaults on past credit held by you.

4. Loans and credit cards that you presently hold.

5. Recent information about loan and credit card applications submitted by you.

What is a good credit score for Home Loan?

A good credit score for home loan would normally start 700 upwards. However, the closer the credit score is to 900, the more faith the credit institution will have in an individual’s capacity to repay the home loan. A good credit score coupled with fulfillment of other criteria decided by the bank/NBFC, one can get financing up to 85% of the total cost of the house.

How is credit score used for home loans?

When an individual approaches a bank or NBFC for a home loan, the bank/NBFC will obtain the individual’s credit score and repayment history from CIBIL.

CIBIL collects and organizes the data and provides it to the institution. Thereafter, banks/NBFCs refer to an applicant’s credit history to determine whether home loan should be approved or not.  Credit score helps banks and NBFCs to disburse home loans more efficiently by avoiding risky applicants and thereby reducing chances of defaults.  

How to improve your credit score for a housing loan?

If you are looking to buy a house in Chennai and your credit score is not up to the mark, don’t worry. With a little financial discipline, one can easily rebuild your credit record and improve the credit score to eventually become eligible for a housing loan.

Here is how you can improve the credit score:

1. Make payments on time and pay the entire amount due. Any part payment will be recorded as overdue in the report.

2. Don’t use entire credit limit. Keep a check on the credit used and keep outstanding balances low.

3. Monitor all bank accounts regularly. This will ensure that no payments are missed at the end of the month.

4. Maintain a balanced combination of secured and unsecured loans.

With a little financial discipline, one can easily improve his/her credit score, and become eligible for a home loan.