Whether you are applying for a home loan or a loan of any other kind, your lender’s loan eligibility requirements will make it mandatory for you to have a credit score above 750. So, what is the credit score? And, why do lenders sanction loans only to borrowers whose credit score exceeds 750? What should a loan applicant do if they do not meet their lender’s loan eligibility requirements? How can borrowers improve their credit scores? In this article, we answer these important questions.
What is a credit score? Credit information bureaus around the world collect information on how credit users use credit and study their attitude towards it. Based on their assessment, these credit information agencies assign a credit score to each credit user. A credit score is a three-digit number that ranges from 300 to 900. A credit score above 750 indicates excellent creditworthiness and repayment capacity. Such a credit score belongs to borrowers who have always repaid their loan EMIs and credit card bills on time and have never defaulted on loan repayment. These are also borrowers who borrow cautiously and are not excessively dependent on credit, have a limited number of hard enquiries under their name and have a healthy mix of both secured and unsecured loans. Lending money to such borrowers involves zero risk for the lender.
It is, thus, that lenders prefer to lend money to borrowers whose credit score exceeds 750 or at least 700. A low credit score, on the other hand, is the mark of a borrower who cannot be trusted with timely repayment of loan money. Such a credit score belongs to borrowers who have either defaulted on loan repayment in the past or have a high credit utilization ratio or are excessively dependent on credit. Lending money to such borrowers is a risky affair and thus, lenders usually either reject loan applications from such borrowers or ask them to add a guarantor or buy insurance to enhance their home loan eligibility.
If your credit score lies between 600 and 699, adding a co-borrower or a guarantor may help you avail of a home loan. However, if your credit score is below 600, no lender will sanction you a loan, even if you add a co-borrower or buy insurance. In this case, you can avail of a loan only if you improve your credit score and have a good CIBIL score for home loan. So, let us share some tips on how to improve your credit score.
Simple Tips on How to Improve Your Credit Score
Improving one’s credit score is easy. Here are a few tips that can prove helpful in this regard.
Maintain a Clean Repayment History
Here is something you must know about credit score calculation: a person’s repayment history makes up about 30% of their credit score. Therefore, borrowers who always pay loan EMIs and credit card bills on time have a good CIBIL score. If you want to improve your credit score, build a clean repayment history. If you forget payment due dates, authorize your bank to make payments on your behalf. If you miss a due date, clear the pending amount as soon as possible. If you are facing a financial crunch, inform your lender and request them to give you extra few days to clear your EMIs. Doing these simple things will certainly help you build a solid credit score.
Do Not Be Excessively Dependent on Credit
Borrowers who are excessively dependent on credit are more likely to default on loan repayment than a borrower who avails themselves of credit only when absolutely needed. Thus, borrowers who are excessively dependent on credit have a low credit score. How do credit information bureaus decide if a borrower is excessively dependent on credit? They check two things: credit utilization ratio and hard enquiries under the applicant’s name.
The credit utilization ratio gives one the percentage of one’s total credit card that is currently being used. If the limit on your credit card is Rs.1 Lakh and your monthly bill is Rs.70,000, your credit utilization ratio is 70%. A high credit utilization ratio indicates an excessive dependency on credit. Borrowers must maintain their credit utilization ratio under 30%. How can someone maintain a low credit utilization ratio? Here are two things that can help. First, use your credit card cautiously and only when needed. Do not exhaust the limit on it. Second, if you do exhaust the limit on your credit card, make sure to clear the entire amount due and not just the minimum amount due.
When an individual applies for a loan, their chosen lender approaches a credit information bureau to enquire about the applicant’s creditworthiness and repayment capacity. This enquiry that a lender makes about a loan applicant is known as a hard enquiry. Too many hard enquiries reflect excessive dependency on credit. Applicants are thus advised to not apply for too many loans simultaneously. If they get rejected for a loan, they must refrain from making another application at least for a few weeks.
Never Close Old Loan Accounts
The length of a person’s credit history also affects their credit score. The longer a person’s credit history, the better their credit score. Thus, if you have repaid a loan, do not close the loan account. Similarly, do not close credit cards as well. Instead, get the cards that you are not using converted into lifetime cards that do not draw a yearly fee.
Maintain a Healthy Credit Mix
Lenders prefer to lend money to borrowers who maintain a healthy mix of secured and unsecured loans as a healthy credit mix indicates a borrower’s ability to handle all kinds of debt. So, avail yourself of both secured and unsecured loans.
Check Your Credit Report for Errors Regularly
Sometimes, financial institutions pass wrong information to credit information bureaus which causes a person’s credit score to go down. Borrowers must therefore check their credit report for errors from time to time and if they see any errors, they must report them immediately.
These simple tips will help you improve your credit score. However, do know that improving one’s credit score takes time. So, be patient.
