What is credit score? How does this impact my home loan application?
A credit score is a numerical expression that represents a consumer’s credit worthiness. This score is basically used bythe lenders like banks and other financial institutions to evaluate the probability of the individual paying his debts. The higher the score the more trustworthy the person becomes with regards to providing them with loans or credit cards.
This score is an accurate representative and helps the financial institutions mitigate their losses. It is based on the such a score that the lenders qualify which individuals to approve for a loan or what is the interest rate that they should be offered, and at times it also helps indetermining which individual would bring in the most revenue.
In India there are presently four companies which have been licensed by reserve bank of India to give out credit scores to individuals. The Credit Information Bureau (India) Limited or CIBIL which became operational as a Credit Information Company in 2001 is the most popular, though in 2010 licenses were given to Equilax and Hughmark too.
A CIBIL score is a three digit number that
represents the summary of individuals’ credit history and credit rating. The basic range of this score is form 300-900, with 900 being the best possible score that can be achieved. If an individual has had no credit history what so ever, it is not a display of healthy credit worthiness of the individual rather itdisplays the lack of customer potential to take any credit responsibility and therefore in such a case the CIBIL score usually is -1, similarly if the individual has the credit history of less than six months, the credit score will be 0.
To build a credit score an individual needs 18 to 36 months, during which he needs to delve into taking credit risks and the comply with subsequent repayments on time. The essence of a good credit score is easily visible in case of obtaining loans. The application of the home loan for example is highly influenced by a credit score.
When the application for a home loan is submitted to the bank, the bank does its own due diligence to make sure lending money to a specific individual does not result in a bad debt in other terms this is a measure adopted by the financial institutions to mitigate their bad debts. A low credit score is one of the major reasons that you see your loan application being getting rejected.
Though each lender has their own benchmark for a minimum score which they do not disclose publicly, but there are certain basic features which affect the credit score in this regard.
Features of credit file considered before approving a loan
• Lack of genuine savings (at least three months of savings)
• Bad credit history (defaults, loan application rejections etc.)
• Unstable employment history
• Unstable address history
• Missed or late payments (ongoing for three months or more)
If in any case the home loan application does get rejected, it is mandatorily advised to not apply to another lender immediately as the piling of the rejected home loan applications would negatively affect your credit score. Rather,the best thing that can be done to rectify the situation is taking measures to improve your credit rating and they apply for a mortgage loan.
Some common means to improving the credit score include
• Getting in touch with the credit repair expert who would help you remove any false information in your credit file.
• It is best not to overdraw your credit card limits and pay off the debt each month on time.
• Make sure of the time aspect of repayment and don’t delay.
• If there are any defaults in your credit file pay them off
• Best not to change jobs or residential addresses until you apply for your mortgage.
• Keep steady savings for at least the next three months.
The above situation clearly underlines the importance of a healthy credit score when applying for a homeloan. Therefore,itis best to put in some thought and planning before applying for a mortgage or a home loan. The acceptance of the home loan request in the first go, boosts your credit score whereas any rejection on the other hand pushes the credit score lower. In the informed systems of today, it is best to keep a healthy score before applying for a home loan.