The Importance of Your Credit Score When Looking For a Home Loan

Real estate prices in India have scaled to unbelievable heights. Buying a house, atleast in the major cosmopolitans in India seems like a distant dream for most especially because the prices have exceeded a common man’s affordability. Inspite of the recent trends in property prices in India showing a marginal downturn, they still remain far above the ground.

To cover the gap between what a common man’s pocket can allow and what home sellers are asking for, a home loan must be sought. This article will quickly walk you through on why your credit score is such a big deal when you are looking for a home loan.

How to proceed when looking for a home loan?

It is important to mention here that banks and other non banking institutions that provide housing loan and are also member of CIBIL, withdraw a loan applicant’s credit report as a first step in evaluation of the loan application. Whether the applicant is seeking a secured debt or an unsecured debt it does not matter. Even for a thing as minor as a request for an upward revision of the credit limit on your credit card, sends a bank looking for your credit report. Most banks and other lenders are known to grant credit to those who have scores greater than or equal to atleast 750. Thus, what’s applicable for any other loan is applicable for home loan too. You should do a cibil score check every year to keep a eye on your score.

Banks and other non banking financial institutions do have their internal policies on credit scores and reports but none of them have ever openly disclosed their criteria. However, by and large 750+ scores are considered as very good score to get through the loan process at any bank, unless you lack a document or fail on other parameters of the lender.

How do I know my score?

Knowing your score is not complicated at all. You can get online and go to cibil’s website . Here you can request your copy of CIBIL report. After a payment of Rs. 550/- you can easily and instantly get yourself access to your score and report. Incase you do not want to invest money in withdrawing your report then you can also go to http://www.freescoreindia.com and request for a free credit score. Although free but you will receive it only three days after you have submitted a complete request. So, if you are not in a hurry, you may consider this alternative.

I know my score, now what?

Once you have received your copy of the report then give it a thorough look. Look at all the details carefully and make sure that they are all correct. Incase you find any false information then it is best to raise a CIBIL dispute and request for a rectification. The reason why you should be so cautious about all the details to be right is because there could be information that is hampering your score. Upon correction of that misleading information, not only will your score improve but also it will become easier for you to impress upon your prospective lenders.

For example, you may have paid in full an old used car loan some time ago but the lender has not reported this to CIBIL. However, the report shows the loan account as still “open” and running. Since CIBIL’s authority is limited to only collating data from its various members, it cannot update unless it has been notified from the bank itself. Thus, by having your data corrected, it will bring down your used credit limit and help increase your score.

I have a good score. Can I use it to my advantage?

Ofcourse! It may come as a pleasant surprise and it is true. Often we have heard that people with poor scores need to worry and not those with good scores. But that is so untrue. The truth is a good score helps the borrower more than the lender. This is so because it not only it means that you can easily seek credit upto the limit of your eligibility but also you can negotiate for favourable terms and a lower rate of interest. Banks and other lenders will be vying for your loan portfolio incase you have a good score. Therefore, you can certainly take advantage of competitive rates.

Are there any loans for someone with a poor score?

Well, ofcourse. Even with bad credit home loans can be acquired. There is a good chance that you may have to pay an interest rate higher than standard rates or you may have to get a guarantor on board or perhaps, get someone with a good credit standing to co-sign your application, but you certainly do not need to deprive yourself of a home loan.

Incase, unfortunately you do not hold a good score then do not lose heart. You can adopt credit healthy ways and work on improving your score. We have covered on our blog on how you can repair your broken credit.

Rejuvenate the power in your credit score

Like they say, “better late than never”.  Despite a poor score, by bringing discipline in your finances and making a fresh start will help you achieve a better score over a period of time. Avoid being nonchalant about your score, have patience and work on it actively. Once better then go after that loan you always wanted.

There may be chances that you do not have the skill required to negotiate on interest rates or you do not understand how you can bring in discipline in your investments. In this case, you must seek expertise of credit consulting companies who can do this job for you. Find comfort in the company of an expert and follow their advice.

Stay tuned for more credit updates!

Advertisements

Important tips for first time home buyers

Congratulations! Now that you have decided to take that all-important first step towards purchasing your long-dreamt of asset – your first home – it’s time to look into all the details with a magnifying glass. It is no doubt an exciting prospect, but it can be overwhelming too, if you do not walk into the loan buying process adequately armed.

Let us quickly walk through the must-dos that every first time home buyer should evaluate before signing on the dotted line.

Check your credit score – A very critical aspect of the home buying process, this vital piece of information can often be the reason for your application to be reviewed favourably or otherwise. A high credit score typically translates into a loan at the most competitive terms, and can mean that over the long term you wind up saving a significant chunk of money. It would therefore be prudent to do a cibil score check and call for a copy of your credit report and know where you stand and if required, take adequate steps to better your score.

Select your home loan provider – There are quite a few lenders out there, be it banks or other financial institutions. Do your homework and select a lender that closely matches your thoughts and philosophies. This is because you will be associated with the lender for a reasonable amount of time (given that home loan tenures are rather lengthy) and you want to work with a lender that offers you comfort and impeccable customer service.

Avoid overspending – Know what you can comfortably afford, and stick to it. While it may seem a dream come true to have that 5 bedroom apartment you always wanted, remember that it comes at a cost – not only do you have to pay your EMI each month, but you likely have other commitments that need to be met as well. Hence, keep it real and buy a house that you can comfortably afford at the time.

Determine your loan eligibility – Prior to applying for a loan, run a quick check to roughly determine the loan amount you would be offered basis your current financial standing. This can easily be done using a number of tools such as a home loan calculator that are available online.

Know the interest rate – Given the sheer number of years you are likely to spend repaying this loan, compare home loans and see how much the property is going to cost you.

Know the paperwork – You should understand in depth the formalities to be followed, both at this stage and throughout the life cycle of the loan and home buying process. This will include valuation and verification checks carried out by the loan provider. Check that all legal documentation is in place. This includes the title and search report, development agreement, Power of Attorney (if applicable), commencement certificate, approved sanction plan from the relevant authority, occupation certificate, NOC etc.

Identify properties – As per your requirement, select properties that you believe you would be interested in. Shortlist/ narrow down prospective properties and focus on those. Meet with the builder (in case of under construction/ new construction) or the present home owner (in case of resale property) to view the property. If selected, make an offer and negotiate the sale amount. The seller (in case of a resale property) may have a particular price in mind. Once you have a fair idea of the value of the property, make an offer to the seller. Have the home appraised and inspected to ensure everything is in place structurally.

Check property documentation – You would need to thoroughly examine the documentation available with the seller, to ensure you are legally in the right. For example, in case of a resale property, the title deeds including the previous chain of documents, copy of the agreement to sell (if already executed between the buyer and seller) etc. are required for loan processing.

Consider the resale value – While they say that property always tends to appreciate, you ought to prepare yourself for any eventuality. Hence, when you buy a house also do factor in its resale value, and whether you are likely to be able to sell it easily, or would it take more time to liquidate.

Property registration – Once the sale has gone through, you would have to sign the sale deed and complete the related registration formalities (including payment towards stamp duty, etc.). Remember that property registration is a must under Section 17 of the Indian Registration Act, 1908. Determine the stamping requirements (as a percentage of the value of the property) and pay the registration charges for a sale deed. In case of a new property being purchased directly from the developer, the developer will convey the title in the name of the society. In case of resale property, then NOC from the society is required. When the sale deed is executed, before handing over complete payment to the seller, all title documents need to be collected from the buyer.

In conclusion

Let your home buying process be a pleasant experience, with no glitches to bog you down. It is therefore important to do all your groundwork thoroughly before proceeding with the purchase.

Remember that as with all loans, here too a good credit score is very important, and hence being credit healthy is one of the starting points to make buying smoother.

Importance of a High Credit Score

A high credit score plays a crucial role in securing one’s financial future. Maintaining a good credit score can easily help avail loans from the financial institutions at competitive rates. Through advanced analytics, the credit bureau assesses an individual’s credit details and then allocates a three-digit number ranging from 300 to 900. Most financial institutions are willing to lend funds to applicants with a score of 750 and above. For CIBIL score calculation, details such as repayment history and borrowing details, among other things, are taken into consideration. The score is analyzed to ascertain the potential risks involved in lending money to individuals.

How to maintain a good credit score?

If one has not taken credit yet, the secret to establishing and maintaining a good score is to start small. This can include holding one credit card instead of multiple cards from credit card companies or availing a small loan. It is also essential that timely payments get reported to the credit bureau. On getting a credit card, make sure that the balance gets paid in full and on time. If payments are delayed, it will not only affect one’s relationship with the credit card companies or company, it will also lower the credit score.

Checking on the credit report at least three times a year can help inculcate financial discipline as the individual becomes well informed about how he or she is managing funds. This helps to spot errors, if any, and also get it corrected immediately, before it can impact the scores. Credit report called Credit Information Report contains details of a person’s past credit history.

Importance of high credit score

Banks and other financial institutions take into account an individual’s credit score to determine whether or not to lend funds. The first impression that the lender has of the applicant is his/her credit score. Lower the credit score, higher will be the interest rate. Lenders can even demand collateral when they realize that the risk is high.

Personal loan, car loan and other kinds of loans can be availed with the help of a high credit score. For example one can avail the best home loans in India with a good credit score. Most home-loan providers are willing to consider scores of 700 and above. The closer the score is to 900 higher are the chances of getting a loan that meets all of the applicant’s terms. Therefore it can be concluded that one can get the best home loans in India through a good credit score. On the other hand, a bad credit score can dampen one’s chances of getting funds at competitive rates.

A high credit score can not only help get favourable loans but also lesser insurance premiums. The credit bureau allows insurance companies, broking firms etc. to access a client’s credit details. A poor score could result in payment of higher insurance premiums.

Missing out on a single payment can bring down a person’s credit score, and a poor score can result in loan applications being turned down. Even though it takes a long time to build a good score, a few missed payments here and there can water it all down. Additionally credit card companies can reduce the limit when the credit scores are poor. Financial institutions want to be certain that the applicant’s has a good payment record before they decide to lend funds.

Factors that can have a positive impact on credit scores

Some of the factors that can positively impact a person’s credit scores are:

  • Paying credit card bills on time
  • Properly utilizing the credit limit that has been approved
  • Not applying for a new credit card unless necessary
  • Making sure financial institutions submit payment details on time to the credit bureau
  • Review credit history on a regular basis to avoid surprises
  • Paying bills in full
  • Keeping balances low
  • Maintaining a healthy mix of credit  (80% in secured loan and 20% in unsecured loan)

It is important to note that holding a high credit score does not automatically mean that an applicant will get whatever he or she desires from the financial institutions. Lenders take other factors as well into consideration for approving or rejecting loans and other funds. The parameters differ from one institution to another. Some of these other factors could include debt to income ratio, income, employment situation etc.

Ways you can improve your CIBIL score fast

My name is Sonali Kulkarni. About three years ago, I settled a loan for 4 lakhs that I took from a NBFC. That settlement still shows on my credit report. It is affecting my credit applications. What can I do to have it removed from my report?

What Sonali has faced, you might be facing too. What she didn’t know is that such “settlements” reflect in the credit report for at least 7 years from the date of last reporting. Yes, as shocking as it may be having unhealthy credit practices or having been reckless with regards to your finances, can affect you miserably for a long time. Our most sincere advice to Sonali was to adopt healthy and responsible credit practices.

Theoretically, a lot people will suggest you to “observe credit discipline” and adopt “healthy credit practices”. We shall answer in this article what it really means to be credit disciplined and how you can be counted as a “responsible credit user”.

There are a number of ways on how to boost your credit score, however, there are some practical habits that you can start implementing from this moment onwards. Below are some very realistic tips that will help you to improve CIBIL score and also by practising these on a regular basis you will be able to maintain authority on your finances.

  1. Avoid cheque bounce: Some things are beyond our control. But things like issuing cheques and allowing them to bounce due to “insufficient funds” is very much within our control. A cheque bounce will not only attract bank charges, further reducing your balance but also adversely impact your score. Issue cheques for amount that you have or else ask to give post dated cheques (PDCs) for dates when you will have funds to honour your payments.

 

It is most advisable that you streamline your finances. Try to manage funds as judiciously as you can, avoid making hasty impetuous decisions regarding your money and most importantly exercise self control over your expenses.

 

  1. Standing Instructions (SI): You may have been late inadvertently in sending payments on your loan instalments or credit card dues. It’s time for taking some corrective action. Do this for future. Find out your billing cycle and your due dates. Set a standing instruction for an auto debit on your salary account or your savings account, where you are sure funds would be available to make the requisite payment. By doing so the lender will automatically debit your account on the set due date and this way you will not be hassled with remembering all the payment cycles. But make sure the account on which you have set the SI should not be out of funds before the due date orelse you will again become a defaulter on loan.

 

You can set SIs for your electricity bills, phone bills, etc too. This habit will keep you free of any anxiety over bill payments.

 

  1. Stop applying for credit from various lenders: You are already in the red zone because you have been unable to service your obligations properly. Yet you go ahead to ask for futher loans? No. This is not a good habit. Firstly, since you are already struggling with a low rank of credit rating, CIBIL member banks and NBFCs will not be willing to sanction any further credit to you. Bankers will be cautious of you as you are bound to exceed your debt servicing capacity and due to overload of credit you may not be able to honour any repayments.

 

Secondly, even if you do have loans from several banks you are bound to mismanage them and forget to make timely payments. A responsible credit user will consolidate his debt to not more than two loans. That means, pay off all other petty debts using money from one loan and then service that single loan on time.

 

Thirdly, it does display that you have an insatiable hunger for credit. Banks and lenders are unwilling to party with such individuals. Credit discipline demands that you do not display such inappropriate behaviour.

 

  1. Prefer Secured Loans over Unsecured Loans: If you must go for some form of credit then prefer to go for secured loans like home loan, loan against your FDs, loan against gold or property or equity holdings. Avoid asking for unsecured loans like personal loans, even if they are easy to get. You may want to apply for a secured credit card vis-à-vis a normal credit card. This is so because, unsecured loans attract a higher rate of interest and that would mean a higher payout of EMI every month. Higher the percentage of unsecured loans, greater will be your responsibility to service it.

 

  1. Avoid using too much of your credit limits: Going overboard with credit will indirectly impact your CIBIL report With an overused credit card, every month there will be increasing outstanding balance to pay off. Unless you habitually pay it off in full, which ideally a responsible credit user will, your outstanding balance will just keep building up. This will mean increased credit burden and might put you in a situation where you may not be able to pay it.

Don’t be desperate for credit. Rein in your urges and be more patient. This will yield positive long term benefits and may you never have to worry about credit woes again.

5 Components of CIBIL Score

 

Very often people are startled to find out that they have a low CIBIL score and they begin to wonder if there are ways to improve credit score. One must understand that building credit is a time consuming activity and requires your persistent efforts. Although there are no quick fix solutions, but there are indeed ways by which one can catch up with the goal of having an ideal score. But before you learn of ways to increase your CIBIL score, you must understand what all fuels your score and on the basis of what are you marked.

Your CIBIL TransUnion Score & CIR

Your score will be between 300 and 900 with 300 being a poor score while 900 being an ideal one. This three digit score tells a lender on how well have you done on your credit front, how diligent were you in your repayments, were your payments on time or were they late often, whether you display a credit hungry behaviour or do you have a portfolio that is skewed more towards unsecured loans. All this and more can be deduced by a lender by going through your score and Credit Information Report (CIR) to judge how likely are you to default on your repayments.

Factors deciding your score

Now, a common question arising in anyone’s mind is what the factors that help determine a credit score are. There are 5 major elements that are considered to impact your credit score. These are:

5 components of cibil score

  1. Timely repayments: The first and the foremost thing to impact your credit score is how well within time have you repaid your loan instalments or credit card dues. Any misses or defaults in payments within the last couple of years will lead to an adverse impact on your score because it would mean that you are facing difficulty in servicing existing debt. This may be due to either insufficient funds or due to you forgetting to pay in time. In either case, there will be a downward impact on the rating. Although there are quite a few ways to enhance your credit score but being on time has the maximum weightage in the calculation of your score. So next time, make sure you don’t miss any payments.
  1. Age of Credit: This is why we mentioned above that building your credit history is a time taking process. Because lenders are interested in your track record as a user of credit, proving to them that you are an old horse might fall in your favour. For example, an old credit card is significant proof that you have been using and maintaining credit for quite some time. It is possible that you are attracted by better deals on latest credit cards. However, keeping a credit card that you have been using since long will have a constructive impact on your credit score. This is because it shows you in a positive light and prospective lenders expect you will continue repaying debt just as you have been doing in the past.
  1. How much credit limit is being used: Like the old saying “Cut your dress according to your cloth” one must but of course be careful in using credit. It might be tempting to use your entire credit limit but a prudent credit user will only use what he or she can repay. For example, you may have a larger sanction limit on your loan but you ask for only 60% to 70% of it. Or, if you spend large amounts on your credit card but are only able to pay minimum dues, then your outstanding bill will keep rolling over and build up to a colossal figure. This might put you in unnecessary pressure and might damage your score as well.
  1. Skewed towards Unsecured loans or Secured loans: A lot depends on the percentage of secured loans and unsecured loans in your debt portfolio. It might seem easier to obtain an unsecured loan like a personal loan, credit card or an education loan for MBA, but they do carry a higher rate of interest. Due to a higher interest burden, the amount of outstanding dues is always higher. On the other hand, a secured loan like a home loan or car loan, where there is an underlying asset, the rate of interest is relatively lower and therefore its payments account for a smaller figure in the portfolio. Secured loans have a positive impact on the credit score.
  1. On the lookout for more and more credit: By doing so, you display an insatiable hunger for living off credit. The debt taken has to be returned to the lender with additional interest money. We all have finite means of earning and limited income. Unless, you can justify your repayment capacity, this behaviour too adversely affects the credit rating of an individual. Seeking more credit means a declining repayment ability and an increased chance of default.

By assessing your credit report, a lender makes up his mind on whether to approve your loan or to adjust their terms based on it or to decline the proposal completely. Believe it or not, but you can break or make your credit health depending on how well you manage your credit score. The more conscious you are of the way you handle your finances the better it will be for a credit friendly future.

Happy Credit to you

Realistic tips to help improve your CIBIL score

There was a time when financial fitness was not up there on the to-do list of most people, but that is definitely not the case anymore. One of the factors that determine from a lending perspective just how healthy you are is your credit score. Globally, the credit score not only helps you get a loan or credit card, but can also be the deciding factor in your securing a job, the premium you will pay on your insurance, getting an apartment on rent or even a new mobile phone connection.

In India, while credit scores are not an alien or unfamiliar concept any longer, the usage as of now is mainly restricted to the banking and financial services (BFSI) domain.

What is a CIBIL score?

We’ve touched upon credit scores – what then is a CIBIL score and how does it differ? Well, a CIBIL score is nothing but a credit score, but with CIBIL being India’s oldest credit information company or bureau, the terms are used interchangeably. A score ranges between 300 and 900 and conveys your creditworthiness to a lender, that is the likely of a customer defaulting on the loan or credit card payment.

However, if you wish to call for a copy of your credit report, you can do so from any or all of the credit bureaus, namely CIBIL, Equifax, Experian and CRIF High Mark.

Factors that impact the CIBIL score

Broadly, given below are the factors that impact the score, and hence it becomes important to monitor the score at regular intervals, to ensure the information contained therein is accurate as well as complete. Any discrepancies need to be rectified immediately, so that they do not have a negative impact on your score.

If you look at the chart above, a large chunk taken into account pertains to your repayment history; hence tracking your payment becomes important.

Tips to improve the CIBIL score

Now that we know what constitutes a CIBIL score and the important and relevance it has in our lives, let’s look at how to boost your credit score.

Check your credit report – Once you are armed with a copy of your credit report, is it the first step towards achieving your goal of good credit health. Check this report and ensure all data mentioned therein is accurate and up to date. In case of any errors, you would need to have them resolved with the concerned lender as well as the credit bureau.

Timely bill payment – Whether credit card dues or a loan EMI, make sure that you do not delay payments, or worse, skip making one. This simple practice can fracture your score if not addressed. Set up payment reminders or sign up for auto debit instructions to ensure that all your outstanding dues are cleared in time, on or before the due date.

Clear off debt – If your credit report is riddled with multiple open lines of credit, consider closing them, one by one. Even if this appears to be a tedious process, in the long run it can do wonders for your score.

Retain ‘good’ old debt – While you may do well to clear off outstanding dues, what can go against this effort is closing old accounts with a good payment history. With your repayment track record amounting to as much as 35 percent of your credit report, it is important to maintain an account that is old, and has been serviced well throughout. This indicates your credit responsible behaviour and can help your score immensely.

Track your credit utilisation ratio – The ideal credit utilisation ratio is 30 percent of your overall limit, be it one card you hold or several. To cite an example, if your credit limit is Rs. 1.0 lakh, make sure your spends do not cross Rs. 30,000 as high utilisation of the limit can indicate credit hungry behaviour.

Keep the limits reasonable – While a high credit limit may sound very attractive, it can also tempt you to spend beyond your means, landing you into a possible debt trap. Hence, while a low limit may not serve the purpose of having a credit card to begin with, it is always a good idea to have a reasonable limit.

Maintain a good credit mix – Having a skewed portfolio may indicate credit hungry behaviour to a lender, especially if you tend to lean towards unsecured products such as personal loans or credit cards. Throw in a healthy mix of secured products as well, and you are likely doing your credit score a favour.

In conclusion

Remember though that there is no quick-fix solution to increase credit score. It is an exercise that takes some amount of time and financial discipline. However, once you put your mind to it, it is only a matter of time before your score gets back on track.

When you’re next applying for a credit card or a loan is when your credit score will come in handy. Hence it is never too late to get on the path to good credit health.