A home loan is an important step to building a personal asset – your home. Whenever you apply for a home loan (or any loan for that matter), lenders pull out your due diligence report to ensure your claimed identity and gauge your loan repayment capacity. For this, you are asked to submit supporting documents. Besides documents, your repayment history is also critical. While earnings and financial capability indicate your home loan eligibility, repayment history reflects your intent and willingness towards repayment of a home loan.
Banks alone, however, do not hold sufficient information to establish a creditor’s true identity. It may happen that a lender with 2 bank accounts has a great track record with one bank but has been defaulting to the other. Hence, to establish a fair identity of their customer, in this case, both banks would have to exchange information with each other.
In reality though, lenders cannot practically communicate with each other directly. Hence, this job is done by credit bureaus. Banks and financial institutions report customer data such as payment history, defaults, etc to the credit bureaus who then compile all of it in a document that is called a credit report. Based on the information in the report, a 3 digit number is calculated using a complex algorithm. This number is called the credit score. Let us understand what is a credit score and what makes it important.
Here’s what Credit Score means
A credit score is a numeric indicator of the creditworthiness of a customer. In India, the credit score ranges from 300 to 900 and lenders will require a good credit score for personal loans. It tells the lender how likely the customer is to repay the loan on time. Not just that, it also gives you loans at lower interest rates. A credit score is largely evaluated on the basis of repayment history, credit utilization ratio, and level of indebtedness.
What makes it important for you as a borrower?
There are 3 key benefits of a good credit score:
- It improves your chances of loan approval
- It equips you with an enhanced borrowing capacity so that you can ask for more
- It helps you negotiate into a better deal with lower interest rates and a higher amount
What do lenders derive from your credit score?
Your credit behavior
Your credit report contains detailed information about your past credit history which includes the types of loans you have taken in the past and the ones you currently have. It also shows how you have used your credit card, what your credit utilization ratio was, and whether you have paid all your dues on time without defaulting. All this data is critical in shaping your credit score and gives the lender a great idea of how you manage your credits.
Your loan repayment capacity
Not everybody can get a loan; you have to be eligible for it. One of the ways eligibility is determined is by checking your income amount and income sources. A loan amount is directly proportional to the amount you earn.
Your ongoing loans
Borrowers who have ongoing loans while they apply for another loan are considered rather risky by lenders. Adding another loan would mean an added financial responsibility with the same income. This won’t be a good scenario for the lenders.
Most lenders, especially banks, are quite rigid and only sanction loans to borrowers who can achieve a minimum score required for personal loan. Hence, having a good credit score is important. If you want to check your credit score, you can check it right now on the CRIF website. For more information, visit CRIF, today!