How to Improve Your Credit Score to Get Loans at a Low Interest Rate?

The feasibility of any Home Loan depends on several factors, the most important of which is Home Loan interest rates. Lenders decide the interest rate to be offered to a borrower based on the borrower's credit score. Let us know about credit scores or CIBIL scores and how they affect your Home Loan interest rate.

What is a Credit Score or CIBIL Rating?

A credit score is a three-digit number ranging between 300 and 900 that depicts an individual's creditworthiness. The credit score of an individual is calculated after considering several factors, such as the borrower's past repayment history, current debt situation, income profile, and credit utilisation ratio. Based on these factors, lenders gauge whether a borrower can be trusted with timely repayment of loan EMIs.

The higher an individual's credit score, the better their chances of getting a loan on favourable terms and conditions. In other words, individuals whose credit score is close to 900 may get the best Home Loan deals.

Does an Individual's Credit Score Affect the Home Loan Interest Rates? 

Yes, the Home Loan interest rate that an individual is offered largely depends on their CIBIL score. When an individual's credit score is excellent, i.e. between 750 and 900, they may get offered the best Home Loan Interest Rates because such a credit score shows high creditworthiness and repayment capacity. Further, borrowers with a high credit score can negotiate for better loan terms and conditions along with lower interest rates.

If a borrower's credit score is between 625 and 750, it is considered a fair credit score with some chance of default. Such borrowers may have to avail of a loan at higher interest rates. Further, the lender may ask the borrower to either add a financial co-applicant or a guarantor to minimise the chances of default. Lastly, if a borrower's credit score is below 625, lenders may not extend a loan. If they do, the terms and conditions of the loan can be unfavourable. 

The good thing is that the credit score is not absolute. By practising proper financial discipline, borrowers can make their credit scores look better. Remember that bettering your credit report takes time. therefore, one has to be diligent in improving their credit report. 

Let us now look at what one can do to improve their credit score and get a Home Loan at low interest rates.

Also Read: Is a Good CIBIL Score Mandatory for Home Loan Approval? 

How to Improve Your Credit Score to Get Loans at Low Interest Rate?

Here are a few things you can do to improve your credit score: 

• The first thing you should do to improve your credit score is to start paying all your bills on time. This includes your loan EMIs and credit card bills. Late payments reflect negatively on an individual's credit standing. Therefore, set up reminders before all your payment due dates and make sure you are never late in clearing your EMIs.

     Also Read: 7 Tips to Help You Improve Your CIBIL Score

• The credit utilisation ratio is the ratio of the credit available to the credit used. Ideally, borrowers should never use the entire amount available to them. Instead, they should try and keep their credit utilisation ratio as low as possible.  

• If your credit is low, do not apply for a loan or a credit card for at least a few months. Too many credit queries depict an individual as credit-hungry and lenders may not want to lend funds to such individuals. 

• Yet another thing that individuals with low credit scores can do to enhance their credit rating is to keep a mix of credit in their credit profile. Credit or loans are of two types — secured and unsecured loans. Secured loans are backed by collateral; unsecured loans do not involve any security. Having both these types of loans convinces lenders that you can handle all the different types of loans.  

     Also Read: What is Credit Mix and How to Boost Your Credit Score? 

• Lastly, keep a check on your credit report. Sometimes, an individual's credit rating decreases due to incorrect information, which may have been shared by financial institutions. So, check your CIBIL report from time to time and if you see any errors, report them immediately. Note that rectifying errors takes time.

Conclusion

The feasibility of a Home Loan hinges on the interest rates secured. Lenders gauge risk through credit scores, determining interest rates accordingly. Thus, enhancing your credit score is important. A high credit score enables favourable Home Loan terms. Employ the strategies listed in the article to enhance your creditworthiness.