When buying a home, one of the most significant milestones is applying for a home loan. It may sound daunting, but a little bit of mindfulness will go a long way in making the process seamless. One of the most important factors that determine whether you qualify for a home loan is your credit score. A strong credit score helps you not only secure a home loan easily but also qualify you for a lower rate of interest and better loan terms.
If you want to know how to improve your credit score, this blog will help you set yourself up for a great score and also make your application a strong contender.
Why Does Your Credit Score Matter?
A credit score is a three-digit number that ranges from 300-900 that gauges your creditworthiness. It is determined by your credit history, which means- on your ability to repay the loan, how many credit cards you own, the past loan tenures and how many mortgages you have.
The higher the score the better your credit score. A home loan approval in India requires a credit score of 750 and above.
Steps on How to Improve Credit Score
1. Check Your Credit Report Regularly
Certain agencies such as CIBIL, Experian and Equifax can calculate your credit score. They scour through your credit history and check for discrepancies- errors, late payments or outstanding dues. In case of any errors, dispute immediately to prevent your score from getting impacted.
2. Pay Your Bills on Time
Ensure you make payments for your credit card bills and EMIs on time. This is the easiest and the most effective way to increase your credit score. Even one payment missed can severely impact the score. Activate auto debit to ensure timely payments.
3. Reduce Your Credit Utilisation Ratio
The credit utilization ratio is the percentage of the credit limit that you are using. The ideal credit utilisation ratio should not exceed 30-40%. Using too many credit cards can indicate financial hardship which can harm your credit score.
4. Avoid Applying for Multiple Loans or Credit Cards Simultaneously
When you apply for a loan, a ‘hard inquiry’ is made on your report. Processing too many inquiries in a short period can portray you as credit-hungry, reducing your score. It is advisable to give space between applications for credit cards and loans.
5. Close Unused Credit Cards Cautiously
Closing unused cards is the logical thing to do, but do so with caution as closing cards can increase your credit utilization ratio. Keep your older accounts open as that reflects positively on your credit history.
6. Diversify Your Credit Mix
Try and keep a mix of secured such as home and motor loans and unsecured loans such as credit cards to increase your credit score. Financial institutions give preference to those borrowers who seem able to manage all loan types responsibly.
7. Don’t Settle Loans or Default
Settling loans for a lesser amount and defaulted loans can impact the credit score adversely. It is always best to pay off the loans promptly and in full to maintain a credible credit history.
8. Become a Joint Account Holder with Caution
In case you hold a joint account, your co-holder’s repayment history and behaviour can impact your credit score too. Ensure that the joint account holder pays off bills and EMIs timely.
Applying for a home loan requires a thorough review and understanding of how to improve your credit score. A good score can turn loan approvals and terms in your favour. Even if you falter, keeping responsible payment behaviour over a few months can give you an edge and ensure a smooth home loan experience.
FAQs
1. What is a good credit score for home loans in India?
A credit score of 750 and above is generally considered good for availing a home loan in India.
2. How long does it take to improve a credit score?
Improving credit scores can take anything from 3 to 6 months if minor improvements are needed. For serious improvements, it can take up to a year.
3. Does checking your credit score frequently affect it?
No. In fact, regularly reviewing your credit report keeps you informed in case of errors and gives you time to make amends.
4. Can I get a home loan with a low credit score?
Yes, it is possible to get a home loan with a low credit score, but it may come with higher interest rates, stricter terms, and the need for a larger down payment or guarantor.
A credit score of 750 and above is generally considered good for availing a home loan in India.
Improving credit scores can take anything from 3 to 6 months if minor improvements are needed. For serious improvements, it can take up to a year.
No. In fact, regularly reviewing your credit report keeps you informed in case of errors and gives you time to make amends.
Yes, it is possible to get a home loan with a low credit score, but it may come with higher interest rates, stricter terms, and the need for a larger down payment or guarantor.
