 "Improve your credit score before applying for a home loan")
Before you apply for a big-ticket loan such as buying a house, get your credit report from one of the country's four credit bureaus. The report would contain your score, a three-digit number that reflects your creditworthiness.
Banks and housing finance companies (HFCs) take this number into account in deciding whether to lend to you. If your score is above 675, you are in a happy situation. If not, you might be denied a loan (different banks have different limits). Here are a few steps you can take to improve the score.
Review your credit report: In the period prior to applying for a home loan, review your credit report regularly, say, every month. Such a review will tell you where your weaknesses are and what you need to do to improve the score.
Get mistakes rectified: Mistakes are common in credit reports. They could happen because there's a mistake in a bank's records or you've been mistaken for someone else. Or you might have been a victim of identity theft. In all these cases, get in touch with the bank or HFC and get the error rectified.
Improve payment history: Before applying for a home loan, make sure you have not been delinquent in the past six months at least. If any of your loans or cards has been "settled" in the past (which means your bank agreed to take only a part of the amount due and closed your account), you should fully repay the lender.
Make timely repayments: The most important factor in improving your credit score is to improve your repayment record. "Once a borrower has managed to pay all his credit card dues and has started paying his EMIs (equated-monthly instalments) regularly, his score will start improving," says Mohan Jayaraman, managing director (MD), Experian Credit Information Company of India.
Close unused accounts: Close any loan account that you no longer use. In deciding on the loan amount you are eligible for, lenders can take into consideration not only the loan dues against your name but also the credit limits available to you. "To maximise the eligibility on a home loan, reduce overall exposure to other loans," says Kalpana Pandey, MD, CRIF High Mark.
Space out applications: Every time you apply for a loan, the lender checks your credit score. When it does so, it leaves behind what is known as a credit application search footprint on your score. Each time this happens, your credit score takes a small dip. "Space out your credit applications, as this could signal to lenders that you are under financial stress," says Jayaraman.
When it is time to apply for a home loan, don't do so to several banks and HFCs at the same time, in the hope that one of them will lend to you. "Evaluate home loan products from lenders and then apply to one or two that are best suited to you," says Pandey.
Use credit limits judiciously: Suppose you have a card on which you have a credit limit of Rs 2 lakh. Avoid using it fully. "Don't use the credit limit up to the hilt. Generally, it is advisable not to exceed 40 per cent of the limit," says Arun Ramamurthy, co-founder, Credit Sudhaar, a company that helps people improve their credit score.
Build a track record: Conventional wisdom would have us believe that our credit score should be high if we have never taken a loan in the past. Things don't work that way any more. If you have not used any type of credit in the past, the bureaus do not have data by which to evaluate you and you end up getting a poor score. This makes it imperative that you start building a record of responsible credit usage through credit cards, personal loans, etc, as soon as you start working. Doing so will prove handy when you have to take a big loan, such as a home loan.
Use the right credit mix: Two types of loans exist, unsecured and secured. Unsecured loans require no collateral. Credit cards and personal loans are in this category. Lenders consider these to be riskier than secured loans, such as a home loan, where they have the house as collateral. Beside building a healthy track record of credit usage, it is also important to use a judicious mix of secured and unsecured loans. "Suppose a person has a credit card and no other type of credit. He might be paying his dues on time, but chances are that his credit score might not be very good. This is because the credit bureaus do not have adequate data on different types of credit to be able to score that person properly," says Ramamurthy. The right credit mix for each person depends on his income and socio-economic background, he adds.
At present, most lenders use the credit score only to decide if to grant you a home loan. If your credit score is good, your loan also gets processed faster. As time goes by, the practice of the same bank charging different rates of interest from customers, depending on their credit score, will also begin. Even today, a poor score means the frontline banks and HFCs won't lend to you, due to which you might have to approach a smaller player. The latter might agree to lend but at a higher rate of interest. Having a poor credit score can, thus, translate into lakhs of extra rupees in interest charges over the tenure of the home loan. Hence, improving your credit score and maintaining it at a high level has become imperative.
CORRECTING CREDIT REPORT ERRORS
- Get in touch with the customer care department of the lending institution and register a complaint. Note the complaint number
- Send an e-mail, quoting the complaint number and details of the issue, to the grievance redressal officer of the lending institution
- Send a copy of this mail to the credit bureau
- The bank or HFC should reply within 30 days, stating the correction has been made
- Forward the response to the credit bureau
- If you don't hear from the bank within 30 days or the problem isn't rectified to your satisfaction, complain to the ombudsman
- If the ombudsman doesn't solve your problem, appeal to the RBI deputy governor
- Finally, you could approach a consumer court
