How to Improve Your Credit Score Before Applying for a Home Loan?

Little did Ritwik Banerjee, a 35-year-old Kolkata-based software engineer, know about ‘credit score’, before his home loan application got rejected by a multinational bank in the city. It was a rude shock for the young man, when the bank told him that his credit score was not good enough, rather, below the accepted limits.

So What Exactly is a ‘Credit Score’ and Why is it Important?

A credit score is a three-digit number based on an analysis of previous and existing credit files. This score is used by banks and non-banking financial institutions to determine the credit eligibility of a borrower. These days, it is the most important determinant after income criteria that decides whether an applicant is eligible for a loan, and if so, to what extent and at what interest rate.

What Is a Good Credit Score?

A score that falls anywhere between 675 and 700+ is considered decent and will keep you in a comfortable position. If the credit rating is 800 or above, it is deemed excellent. Simply put, the higher the score, the better it is. From a bank’s perspective, a loan applicant with a high credit rating is an attractive borrower, while the opposite is true for those with a score lower than 675.

How Do I Know My Credit Score?

While CIBIL is, by far, the best-known credit rating bureau in India, there are three others that operate in the country — CRIF High Mark, Equifax, and Experian. You can easily check your credit score from any one of the four agencies online, and request a credit report. If your credit report is below 675, you will need to boost it up before applying for a loan.

What Can I Do to Improve My Credit Score?

There are various measures to increase the credit rating. The steps mentioned below will help you improve your overall credit score. Make sure to periodically check your credit report, in order to assess your improvement.

Rectify mistakes – Often there are mistakes in credit reports. These errors can happen due to a number of reasons. It might be because the bank did not update your record, or maybe, you have been mistaken as someone else. Sometimes, mistakes also occur due to identity theft. If you find anything suspicious, reach your bank to get the mistake rectified.

Make before-due-date repayments – The easiest way to improve the credit score is to make timely payments. The rating incrementally increases when a borrower makes before-due-date repayment of EMIs. The score gets a substantial boost if a borrower prepays a loan, or clears credit card dues in one shot. If you have “settled” any loan or credit card dues, that is, paid a part of the total due to close the account, you will have to repay the entire amount to improve your credit rating.

Multiple applications – Research home loan products offered by various institutions, and then, apply to one or two banks that you find suitable. Never apply to several banks at the same time, hoping that one or the other will approve your loan. Risk managers exchange databases, and if your name shows up in multiple accounts, your score takes a dip.

Prudent use of credit limits – Avoid using the full limit of your credit card. For instance, if you have a card with a limit of Rs.2 lakh, keep the usage below Rs.80, 000. Experts recommend not to exceed 40% of the total available limit. Sensible use of credit limits helps improve the credit rating.

Token loan – Many people think that not taking a loan will keep their credit score high. Actually, that is not the case. If you have not taken any loan in the past, credit bureaus won’t have the required data to set up your score. To improve your credit rating, take a token loan with a short repayment structure. Timely repayment of the loan will help build a solid track record, which will come handy while availing big loans like home finance.

Credit mix – Make use of both secured and unsecured loans to pump up your credit score. Unsecured loans are given without any collateral security, and they include loans like personal finance and credit cards. Interest rates are usually higher in case of unsecured loans, as banks consider it to be riskier than secured loans with collateral, such as home and car finance. Putting both secured and unsecured loans in your portfolio will help credit bureaus to better understand your credit usage, which, in turn, will improve your rating.

Implementing the above-mentioned strategies will help you improve your credit rating prior to applying for a loan. This won’t be an overnight process, though and you may have to wait for a few months to a year to see your credit score climb. However, don’t stop following these steps just because you’ve qualified for a loan. Buying a home is the just the beginning and there will be more expenses down the road. A healthy credit score will always keep you eligible for financial assistance from banks, should you need another loan to meet your other post-home buying expenses.