CIBIL Score or Credit Score is a very important factor, based on which, banks and lenders could accept or reject home loan applications. A good credit score and good credit history guarantees faster approval with favorable loan terms. On the other hand, an application could be declined if the applicant has a low credit score and poor credit history.
A good credit score may vary for every bank and financial institution in India. Hence, it is essential to check with the lender about their acceptable credit score before applying for a home loan. Generally, the credit scores range between 300 to 900 and a good CIBIL Score starts from 700.
An Overview of Credit Scores:
Above 800 – Excellent
This score range assures fast and easy loan approval, low interest rates with good loan terms.
761- 800 – Good
An applicant with a good score is considered a dependable borrower with high chances of loan approval and good repayment rates.
701-760 – Fair
The applicant will be considered an average borrower – neither good nor bad at handling credit payments. S/he could still be rejected, and if approved, may not be able to negotiate very favourable loan terms.
601- 700 – Low
300-600 – Very Low
Banks are wary of applicants in this credit score range, even if there is a guarantor to cushion the risk. These are high-risk borrowers with poor credit history. They are deemed financially unstable, who incur huge debts and default on payments.
What Is CIBIL / Credit Score?
Credit score is a three-digit number that summarizes your entire credit history. This includes all secured and / or unsecured loans and other debts, both paid and outstanding.
You can obtain your entire credit report from CIBIL and know your credit score before applying for a home loan. The report includes the following:
- Records of credit availed
- Records of loan repayment and credit card bills
- Late payments and / or defaults
- Loans and credit cards currently held
- Loan and credit card applications submitted over the years
How Is CIBIL Score Used?
The first step for banks and lenders before processing home loans is to access the applicant’s credit score and repayment history from CIBIL.
CIBIL or Credit Information Bureau (India) Limited is a credit bureau that maintains and calculates credit score. It prepares a detailed Credit Information Report or CIR and credit score for individual applicants and organisations. Thereby, banks can set parameters to identify low-risk customers, disburse loans more efficiently and reduce defaults.
How Is CIBIL Score Calculated?
Loan Repayment and Duration
Timely payments of loans and / or credit cards over the years shows disciplined credit habits and thus, boosts your credit score. While, defaulting and late payments impact your score negatively.
If you have a low credit score and have faced rejection from other lenders, avoid applying to other banks repeatedly. Every time an application is received, banks have to look up the applicant’s credit history. When multiple banks view credit ratings of the same applicant, it can adversely affect the credit score.
Credit Utilization Ratio
The ratio of the credit amount spent to the credit amount available to you is known as credit utilization ratio. A high ratio reduces your credit score. So, restrict your credit usage to about 30% of your available credit on a regular basis to get a good score.
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Close or limit unsecured loans like personal loans or credit cards with high credit limits. These indicate outstanding debt and mark you as a high-risk borrower, thereby reducing your credit score.
How to Improve Your CIBIL Score
If you have a low credit score and want to apply for a home loan follow these steps:
– Make timely payments and pay the entire amount that is due. Part-payments are reported as overdue.
– Avoid using your entire credit limit. Check your credit utilisation and keep outstanding balances low to get a good credit score.
– Keep a check on your accounts (single and / or joint accounts) regularly to make sure that payments are up-to-date, both by you and the joint account holder.
– Keep track of your credit history and score to rectify any errors; and improve your score on a regular basis.
– Maintain a balanced credit portfolio of both secured and unsecured loans to improve your credit score. Having too many unsecured loans can reduce your score.
Your credit score could change from time to time; depending on credit factors like repayments, new credit and other variables. So, before applying for a home loan check your credit score and confirm the credit parameters with your bank or lender.