Importance of Credit Score in Post-Pandemic scenario for your Home Loan – Explained!
The Covid-19 pandemic has brought a significant change in the financial conditions of many people. While a lot of salaried people have lost their jobs, many businesses have closed, affecting the earnings of many self-employed individuals drastically. This has led to a reduction in their cash flows. Identifying the issue, the Reserve bank of India (RBI) has reduced the benchmark interest rates, leading to home loan interest rates reaching a 15 years low. On the other hand, post Covid-19, the lenders have also started pricing the loans differently, wherein the borrower’s repayment capacity and creditworthiness are getting a higher weightage than before.
This change in the pricing of loans has put a much greater emphasis on credit scores for home loans. In effect, you can get a lower interest rate on a home loan if you have a high credit score, preferably above 750.
If you have been planning to avail a loan, the need of the hour is to recheck your credit score before applying. Here is a brief guide on credit score and why it is important.
What is a credit score?
A credit score is a numerical representation of your creditworthiness measured on a scale of 300 to 900, 300 being the lowest and 900 being the highest. The higher the credit score, the better. To avail a home loan, a credit score of 700 and above is considered ideal. You can check your credit score online by entering basic details on the Credit Information Bureaus’ websites.
Why is a credit score important?
Your credit score is based on your credit report prepared by credit bureaus in India. Your credit score is calculated considering the following factors – your loan repayment history, the total number of loans, credit utilization ratio, credit mix, length of credit mix, etc. The lender uses your credit score to determine your repayment capacity. Defaulting in making EMI payments or outstanding credit card bills can put a negative impression on your creditworthiness and credit score.
What should you do?
You must only apply for a home loan with a high credit score, especially in the post-Covid scenario. It would be better to improve your credit score before applying for a home loan to get the best interest rate. You can improve your credit score by taking the following steps-
- Never miss out on your debt repayments like Credit Card dues or EMIs
- Maintain a low credit utilization ratio
- Avoid applying for multiple home loans at the same time
- Check your credit report and request for the rectification of the discrepancies.
- Customize your credit limit
- Retain your old credit cards
To sum up
A credit score is a reflection of your repayment capacity. Due to the disruptions of cash flow during the pandemic for many individuals, credit score is being used as a primary benchmark for weighing the repayment capacity of the borrowers. Therefore, ensure that you apply for home loan only when you have a high credit score. Understand the importance of credit score and use the tips mentioned above to improve your score and increase your home loan eligibility today.