Home Loan Tips: Banks use THIS tool to approve loans at lower interest rate — Check details

CIBIL Score for Loan: Credit score is the perfect tool to esimate a person's financial status and credit-worthiness. When looking to apply for a loan, your credit score decides if banks will lend to you and at what rate of interest you get your loan. So, it becomes all the more important to maintain a healthy credit score. 

On Zee Business' Money Guru show, Satyam Kumar - CEO of LoanTap, and Pankaj Mathpal - Managing Director of Optima Money, spelled out ways in which credit score affects a person's borrowing power and how poor credit score can be improved in order to secure loans like home loan at cheaper rate.

Relation between credit score and loan

Banks lend money based on credit score. Good credit score indicates that a borrower has paid his/her loan instalments on time, hence is at a lower risk of defaulting than someone with a poor loan repayment track record.

Credit Information Bureau (India) Limited or CIBIL is a popular credit information company licensed by Reserve Bank of India that assesses a person's 'CIBIL score'. Banks and financial intitutions track this three-digit CIBIL credit score rating to assess a person's credit-worthiness or loan eligibility. An excellent CIBIL score can even lead to a 0.15-0.25% discount on a bank loan.
(Source: SBI)

Below, we answer what is a healthy credit score? What factors affect one's credit score? And, how you can improve a poor credit score? 

What is a good credit score?

Credit score ranges from 300 to 900 —
A credit score of 750 or above is considered excellent. 
A score between 550 to 750 is considered good.
And, a credit score between 300 to 550 is considered poor.

What affects credit score?

Your credit score depends on many things —
*30% of CIBIL score depends on whether you have repaid your previous loans on time or not.
*25% depends on whether you have taken a secured or unsecured loan.
*25% depends on your credit exposure.
*20% depends on loan utilization.

How to improve credit or CIBIL score?

*Take small personal loan or buy appliances like mobile phone, washing machine, fridge, LED or any household item on EMI. And pay the instalments on time to improve your credit score.
*Keep your credit utilisation low. 
*Never use your credit cards beyond 30% of their limit.
*Repay all credit card bills on time.
*Keep checking your credit score periodically.
*Avoid taking loan against credit card.
*Keep old bank accounts, and old credit cards active. In case of bank accounts, simply maintaining minimum balance and keeping them functioning boosts CIBIL score. Credit rating improves the longer you hold a bank account, and long-standing credit cards improve credit history.

Apart from maintaining a healthy credit score, these tips can be followed to get home loan at lower interest rates — 

How to get a cheap loan?

*Maintain good credit score: Banks give rebate on interest rate to those who have a good credit history and have repaid earlier loans on time.
*Keep loan-to-value ratio low: Banks' exposure is lesser when you contribute more, hence it enhances chance of loan approval.
*Opt for a joint home loan: A co-applicant with a good credit score can improves chances of lower interest rates. It also increases credit limit and loanees can avail income tax benefits.

Home Loan Essentials

*Read the terms and conditions of the loan properly
*Keep a track of promotional offers and loan melas.
*Assess your financial situation and limit your EMI outgo to 30-40% of income.
*Utilise loan websites and tools to compare loans online 
*Read the fine print and check all hidden charges which may be levied in addition to the loan processing fee.