Applying for a home loan might seem like a daunting task since it is a huge responsibility. But today, most young professionals apply for a home loan or a vehicle loan early on in their life. An immediate concern you may have is getting your loan application approved. You have done your research and zeroed in on the right lender. You have ensured all your documents are in place. But have you considered equipping yourself with your Credit Score prior to applying for the loan? You should because in all probability, you already have one. You just may not know it!
If you have applied for a home loan or own a Credit Card, you already have a Credit Score. Your potential lender shall consider it among other factors to evaluate your eligibility. A high Credit Score does not guarantee loan sanctioning. But a low Credit Score reduces your chances considerably. Can you prevent a lender from obtaining your credit information? No. Lenders can share your credit information with other lenders without your permission. Ignorance is not bliss when it comes to your Credit Information, my friend!
So let me share with you some tips that you could keep in mind which will help you improve your Credit Score and get the Green Flag of Approval for your loan from your lender:
1. Be On-Target with your Loan Payments
Being careful about your finances and avoiding any defaults on previous loans will lead you to getting a good Credit Score. Try and keep away from the following scenarios:
a) You couldn’t pay a part of a prior loan and it was written-off by the lender or;
b) It was settled i.e. you couldn’t pay off the entire loan and the lender recovered as much as possible and closed the loan.
Defaults tend to negatively affect your Credit Score and hence reduce the chances of your abilities to take a loan in the future. Be accurate with your loan payments.
2. Be on schedule with your Credit Card Payments
Being punctual with your Credit Card payments could have a positive spin on your Credit Score. A Credit Card company may settle a Credit Card payment for lesser than the amount owed by you. But your CIR will reflect this and hence should be avoided. Also, you need to consider that defaults in the last year will have the most impact. Try and keep your track-record as clean as possible.
3. Be restrained in your need for Credit
So you have been filing your wallet with unused Credit Cards because they claim to be ‘Zero Interest’? Well, it is highly likely that in addition to making your pocket heavy, they could be the reason why your last loan did not get sanctioned. Now, there are 4 important factors to be noted here:
a) Good credit histories can be a benefit to your credit score, implying good financial health. If you don’t have any Credit Card, it could make you appear a risky target for a Credit Institution. So it may be a good idea to have at least one credit card in case you don’t have any loans against your name.
b) Try not to approach multiple lenders for loans or Credit Cards. Then they would enquire your credit details from the CIC’s for evaluation. This could make you appear ‘Credit Needy’ thus lowering your Credit Score.
c) The total credit you have access to, reduces with each successive Credit Card in your name by the amount of the Card/s’ Credit Limit.
d) Cancelling all your Credit Cards may not be the answer. It could reduce your score. The reason is that it might appear that you are not financially capable of paying off the outstanding balance on the Credit Card.
From the above, it seems clear that the solution is to strike a happy medium and close some cards down, but don’t close them all. Of course, henceforth, you might want to politely turn down the next tele-caller pitching for a Credit Card. Only if you are close to maxing out the limit on one Credit Card, do you need another.
4. Ensure the payments for your Add-On Credit card are on schedule
The primary card holder may be responsible for payments incurred on the Add-On credit card issued in your name. It may surprise you to know however, that any default made in payments shall impact the Credit Score of the Primary and the Add-on card holder. You should aim to pay your dues on your Add-On Credit Card on time.
5. Ensure the payments for the loans you have stood for as a Guarantor are made on time
A guarantor is a person who provides a guarantee to the lender that he will honour the obligation in case the principal applicant defaults. Any default on the payment of the loan by the principal applicant, will affect the guarantor’s Credit Score as well. You can’t afford to ignore this ‘conditional’ obligation of yours.
6. Time it right: When you apply can have a big impact
Some data about old applications could remain on your file for one year and some for more. Equip yourself with your Credit Information Report and you can hold off applying for a loan until the old issues have lapsed. This will increase your chances of getting the green signal from your lender for your next loan.
7. Pay your phone bills or insurance policies on time
Not paying your phone bills or being late on your life insurance policy premium, would affect your Credit Score if you were in the US. However in India, this is still some time away. Steps are being taken to ensure that telecom and insurance details are also provided to CIC’s. This shall assist in completing the database, with the mutual consensus of regulators Trai, IRDA and RBI. The basic stumbling block is the issue of privacy. Once this information is also shared with the CIC’s, the non-payment of your utility bills can have a role to play in your loan application.
Of course getting credit does not depend on Credit Scores alone. Lenders require you to satisfy other eligibility criteria as well, like your income and the amount of the EMI. However, Credit Scores play an important role in your loan approval.
Companies get themselves rated by Credit Rating Agencies in order to take a loan at competitive rates. (CIC’s also score companies but that’s a whole other article!) Now you can bargain for a good rate with your lender if you have a good Credit Score. Get to know you Credit Score. And leverage it! Be smart. Save your hard-earned money.
Cheers to a healthy, financially-stable and comfortable life!
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