What is the importance of a credit score or CIBIL score in getting a home loan?

[ecis2016.org] Banks rely on credit bureaus to provide them with useful data to rate a borrower’s creditworthiness. Assigned through a score, this rating is more commonly known as a borrowers’ credit or CIBIL score in India

Banks offer housing loans to prospective borrowers, based on their capability to repay the debt. Financial institutions ascertain the loan applicant’s creditworthiness by checking various data related to his/her financial history and the manner in which she/he may have dealt with debts, so far. Banks depend on credit bureaus to provide them with this data, which is more commonly known as a borrowers’ credit or CIBIL score.

You are reading: What is the importance of a credit score or CIBIL score in getting a home loan?

What is a credit score? Credit scores are assigned by credit bureaus to borrowers in India, based on the latter’s banking/payment history, on a scale of 300 to 900. Banks offer home loans easily to borrowers with credit scores of 700 and above. Borrowers with poor credit scores have to pay a higher interest rate.

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What is CIBIL score?

Even though the term CIBIL score is considered synonymous with credit score, note here that CIBIL is one of the four credit bureau companies in India that provide credit information. The four companies are:

1. TransUnion CIBIL
2. Equifax
3. Experian
4. CRIF Highmark

Any of the four companies can provide your credit history. However, a credit score generated by TransUnion CIBIL is known as a CIBIL score.

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Credit score vs CIBIL score

Owing to the wide popularity of TransUnion CIBIL in India, (TransUnion CIBIL was India’s first registered credit bureau company), credit scores are often referred to as CIBIL score. Formed in 2000 by a group of financial institutions, CIBIL (Credit Information Bureau (India) Limited) was acquired by US-based TransUnion, earning the name TransUnion CIBIL.

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What is a CIBIL score range?

Based on the credit history of the user, credit bureaus assign the following scores:

CIBIL score of 700+: A score above 700 is considered a no-risk zone for the financial institution. This means that the lender will be willing to offer you the loan, at their lowest interest rates. Note that 79% of loans are sanctioned to borrowers with a score higher than 750.

CIBIL score between 600 and 700: Lenders will also be willing to offer loans to a person with a score in this range, which is considered as a less-risky zone. You may, however, have to pay a higher interest than those with a better score.

CIBIL score of 300-600: A person with this credit score is considered to be in a risky zone. Banks shy away from funding people in this category.

CIBIL score 1-5: This credit score is assigned to people with less than six months of credit history.

-1 credit score: This credit score is assigned to people with no credit history. This rating is assigned to first-time borrowers with no loan or credit in their names.

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How is CIBIL score calculated?

Credit bureaus arrive at credit score ratings, based on four prime factors. These include:

• Repayment history
• Existing loan and credit utilisation
• Type of loan and tenure
• Number of credit inquiries

While the first two parameters are invariably given the highest weightage when assigning a credit score (typically in the range of 30%-35%), different credit bureaus might give different weightages to each parameter.

Fee to get a credit report / CIBIL score check

While a borrower can check credit score for free from any credit information company once in a calendar year, under the rules prescribed by the Reserve Bank of India (RBI), credit bureaus might charge a nominal fee for the same. The borrower will always have to make a payment to get a credit report along with his credit score check.

To get more than one free credit score in a year along with the credit report, the borrower will be charged a fee as listed below by TransUnion CIBIL:

Basic credit report with credit score: Rs 550 (one report in a year)

Standard credit report: Rs 800 (two reports in a year)

Premium credit report: Rs 1,200 (four reports in a year)

Free credit report in India

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From January 1, 2017, credit information bureaus in India were mandated to give one free credit report once in a financial year, to every individual who asks for it. This way, you can get four free credit reports in a year, by inquiring about it at the four credit bureaus currently operating in India, namely, TransUnion CIBIL, Equifax, Experian and CRIF Highmark.

If you seek a second report from them in a year, credit bureaus, banks and financial institutions typically charge a standard fee to provide you with your credit check report.

A large number of financial institutions, especially fintech start-ups, also provide you free CIBIL reports. Mostly third-party entities, these fintech companies and banks partner with credit bureaus, which authorises these parties to give customers the credit score they come up with and to provide them with free CIBIL reports.

However, they will demand several details from you, to provide you with a basic credit report. You will be asked to fill a form for a free credit report, where you will have to provide your personal details including name, date of birth, gender, address, your email ID and mobile number, professional details, including job profile and monthly salary and your PAN details.

You will also have to agree with the ‘terms and conditions’ of this entity.  Based on your query and credit profile, this platform may then start sending you communication about its various loan and other products.

Platforms that provide free credit report in India

Apart from the four credit bureaus, other platforms where you can get a free credit report include HDFC Bank, Paisabazaar, Bankbazaar, Creditmantri, Wishfin, Tata Capital, Creditbazaars, Mymoneykarma, Bajaj Finserv, etc.

Can you rely on the info in your free credit score report?

Be advised that a free credit report gives you an overall understanding about your credit situation. This will not be a detailed document, talking about all aspects of your creditworthiness. Also note that this free credit report will not contain your credit score. You will have to pay up some fee to get a detailed CIBIL report.

How much time does it take to get your free credit report?

Once you provide all your information, the credit bureau or the bank or the fintech company will send you your free credit report within hours of your inquiry.

Will inquiry for free credit report impact my credit score?

The application made on any platform about free credit score report is known as soft inquiry and does not have any impact on your credit score.

How to check credit score?

• To check CIBIL score and receive it in your mailbox, visit the CIBIL website, www.cibil.com.
• Select a subscription from among basic, standard and premium.
• Key in details such as your name, email address, ID proof, etc., to create an account.
• Make the payment based on the subscription type.

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How much time does it take to get a CIBIL report?

Your CIBIL report and score will be sent to your e-mail address within three to five working days, if you are applying online. In case you apply for a credit report offline, CIBIL will take a week to issue the credit report after verifying the documents.

Is there a difference between credit ratings of different credit companies?

Since each company uses its own specific methodology to assign credit scores to individuals, using the same data provided by banks and financial institutions to each one of them, the rating assigned by one credit bureau to a borrower may be different from the score assigned by another credit bureau.

Credit score for home loan

Almost all banks in India offer their best rates of interest to people with a credit score of over 750. This means that if a bank is currently charging, say, the lowest interest of 5.80% on its housing loan, it will offer this rate only to those with a credit score of over 750. Borrowers with lower scores will have to pay a higher rate of interest.

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Nine assumptions that will harm a home buyer’s credit score

Banks and housing finance companies (HFCs) thoroughly examine the credit profile of the applicant, along with several other factors, before approving any home loan. This scrutiny by financial institutions is likely to grow more rigorous, if the defaults on home loan repayments increase, owing to the impact of the Coronavirus pandemic on individual incomes and businesses.

In a scenario like this, wrongly-held notions about your credit score could reduce the chances of buying your dream home, at a time when property prices in most big cities are at a low.

“Conversations with our customers over the years, have revealed some extremely grave myths they have about the credit score,” says Radhika Binani, chief product officer, Paisabazaar.com.

Here are some of the commonly-held, inaccurate beliefs pertaining to the credit score and its impact on your home loan borrowing capacity.

1. Staying off credit is good 

Thinking that banks will be impressed by the fact that you have never depended on credit to meet any of your financial needs, is ill-founded. In the total absence of a credit history, banks will have to go through a more rigorous scrutiny process, to figure out your credit-worthiness and repayment capacity. Hence, they will be more cautious, while examining your home loan application.

2. I can quickly improve my credit score

Since you know that the absence of a credit history is actually a bad idea, you may be tempted to quickly apply for credit cards and small loans, to create a history. This would be a bad idea, because such attempts make it obvious to the credit institutions that you are trying to hurriedly create a credit history, to get a huge loan subsequently. This would also reflect poorly on your credit score.

3. It is okay to touch the upper limit on your credit

Among the facts based on which your credit score is prepared, is how much of your available credit you are using. Your payment history, loan amount, length of credit history and credit mix, are other key factors. Maxing out the credit limit sanctioned on credit cards, pushes up the credit utilisation ratio (the ratio of your outstanding credit card balance to your credit card limit). In simple terms, credit utilisation shows the amount of available credit a borrower is using. The lower the ratio, the better.

Suppose your balance is Rs 20,000 and your credit limit is Rs 50,000, the credit utilisation for your credit card is 40%. Now, a move that increases your repayment obligations would hurt your credit score.

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4. Being a guarantor to a loan is fine

A friend or a relative may have asked you to be a guarantor, in his loan application and you may have agreed, considering it to be a harmless request. However, this impacts your own credit worthiness in two ways:

1. If the friend defaults on his loan, you are legally obliged to meet the liabilities.
2. Your own borrowing limit might be constricted by the outstanding loans for which you are a guarantor.

5. My credit report is up-to-date

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On full repayment of a loan, the bank, which lent the money to you, will provide you with a clearance report immediately. However, it may take around 30 to 60 days for this information to be shared with the credit bureaus, who actually prepare your credit score. The changes in your credit balance would reflect on your credit score, in due time and not immediately.

“Everyone needs to check and track their credit scores, at least once every three months, even if you do not need a loan in the foreseeable future. This is because crisis and uncertainty can strike anytime and you may need to take a loan,” says Binani. Credit reports may also contain wrong information, fed erroneously by the lender or due to clerical errors on the credit bureau’s part. “These errors can adversely affect one’s credit score and thereby, his future credit card and loan eligibility. The only way to detect such errors, is to fetch the credit report at regular intervals and report inaccuracies, if any, to the bureaus for rectification,” she adds.

6. Delays are fine, as long as I pay the EMI

Credit bureaus do not assign ratings, only on the basis of whether or not you have been able to repay your loans. They are in fact more interested in gauging how diligently you do that job. Delayed credit card payments and EMI defaults, will convince them of a lack of financial discipline on your part, even if you ultimately repay the loan. In fact, ratings are assigned based a variety of factors, and will be impacted in case the bureau finds out your  source of income is impacted in any manner or form. 

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It is pertinent to mention here that credit bureaus slashed ratings of numerous borrowers who avail of the benefits of the government’s six-month loan moratorium, announced by the RBI in March 2020 in order to offer relief to consumers in the aftermath of the coronavirus pandemic.  While announcing the moratorium, the RBI had categorically said applying for the moratorium will not have any impact the credit rating of the beneficiaries.

7. I should close old accounts

As credit cards are considered unsecured loans, some of you may hurry to close an old account, with the notion that it would reflect positively on your credit score. This might, in fact, have the opposite effect on your credit rating. An old credit card account with a good repayment history, would help your prospects as a borrower. Since credit bureaus also factor in the length of your credit history while assigning you a rating, an active old credit card account, would only be helpful towards building your credit worthiness.

8. Settled loans do not find a mention in my records

Each and every financial transaction has a mention in your credit history. These include the number of times you might have called a bank, to enquire about home loans or credit cards.

9. A bad credit score is permanent

A bad credit report today could be completely turned into a good one by the borrower, by way of adopting financial discipline. Pay your bills on time, pay off your debt, do not apply for too much credit in a short span and check out your credit score regularly, to get any errors in your credit report corrected. By doing so, in good time, you can completely transform a bad credit score into a good one.

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How to improve your credit score for a home loan

By Content Consultants

Improving one’s credit score has many advantages. Not only does it make it easier to obtain a loan, but it can also help the applicant to get an attractive rate of interest

August 4, 2018: It is advisable for home loan seekers to obtain a credit report, before applying for a large loan, such as a home loan. This report, which provides a person’s credit score, can be obtained from any one of the four credit bureaus operating in the country – CIBIL, Experian, Equifax and Crif High Mark. A score between 750 and 900 is considered as excellent. However, if the score is below 675, one may need to improve the credit score before applying for a home loan.

“A good credit score can help you get a loan at a more attractive rate of interest. This can lower your interest burden by lakhs of rupees, during a loan tenure of 15-20 years,” asserts Sujit Kumar, a Delhi NCR-based lawyer, who improved his credit score, before applying for a home loan.

Immediate tips to improve your credit score

When it comes to improving your credit score, first check for any error in your lender’s record books. While you may have repaid a loan, the bank’s records may still be showing some credit outstanding against your name. Rectifying such mistakes, will improve your credit score.

Disagreements between a lender and a borrower may also be the cause of a poor credit score. Resolving such disagreements, paying the dues and closing the loan account can boost your score.

The most important thing for a good credit score, is to make all the payments on time. If you have missed a particular payment, make amends right away by paying up.

Consolidating your credit will also help. You may have taken five personal loans. Consolidating all these loans, into a single one, will look better on your records, by indicating that you are not excessively credit-hungry.

Also, when it comes to credit card bills, many borrowers pay up only the minimum amount and revolve the rest of their credit card loan. This is a bad practice, as the rate of interest on credit card loans is very high. If you have been doing so, replace the credit card loan with a personal loan, which will bring down your interest charges and enable you to meet your dues.

Long-term tips to improve your credit score

In case you have a delinquent loan against your name and you don’t have the ability to repay right away; this is a situation that can only be remedied over a period of time. If you have a high proportion of unsecured loans, vis-à-vis secured loans, you should try to alter the mix over a period of time.

Another behavioural change that you must make, is to avoid shopping for loans excessively. In trying to bag the best possible deal, do not apply or make enquiries at 15-20 banks. Each time you make an enquiry, it gets registered against your name and indicates that you are credit-hungry.

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“If a person is too hungry for credit, it reflects poorly on his credit score,” cautions Arun Ramamurthy, director, Credit Sudhaar Services.

Suppose that your credit card provides you with a credit limit up to Rs 2 lakh, don’t use up the entire limit as this is also perceived as a sign of credit hunger.

Despite your best efforts, if you are not able to achieve a good credit score on your own, then, there are professional agencies that you can turn to, such as Credit Sudhaar, etc. These agencies can help you to achieve the right mix of secured and unsecured loans. They tell you about the right number of credit cards you should own, given your economic status. They also inform you about the maximum percentage of credit on your credit card, beyond which you should not go.

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FAQs

What is a credit score?

Credit scores are assigned by credit bureaus to borrowers in India, based on the latter’s banking/payment history, on a scale of 300 to 900.

What is a good credit score?

Banks easily offer home loans to borrowers with credit scores of 700 and above. Borrowers with poor credit scores have to pay a higher interest rate.

Who offers credit score in India?

You can get your credit report from any of the four credit information bureaus – CIBIL, Equifax, CRIF High Mark, or Experian.

Would my score be affected if I check my credit score?

Your credit score will remain unaffected when you check the same.

What is CIBIL score full form?

CIBIL stands for Credit Information Bureau (India) Limited.

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