Want to get a home loan? You may want to check your credit score first
Defaulting on a credit card payment could come back to haunt you. Here’s how to check your credit-worthiness, figure out how to fix it.real estate Updated: Jun 16, 2017 19:42 IST
Marketing executive Deepak (last name withheld on request) identified his dream 1BHK home in Thane, negotiated a deal, made the down payment of Rs 12 lakh and proceeded to apply for a Rs 50 lakh home loan. To his shock, his housing finance company told him he was listed as a defaulter on the CIBIL files.
“I could never have imagined that defaulting on a disputed credit card payment of Rs 25,000, three years earlier, would land me in such deep trouble,” he says. Six months on, Nair is neither getting a loan from a finance company nor is the building refunding his downpayment. “I wish I had settled the credit card issue. Or at least checked my credit report before applying for the loan,” he says.
The thing is, many people don’t even know they have a credit score; don’t realise that as soon as they accept a credit card, the Credit Information Bureau India Limited (CIBIL) begins to track their credit-worthiness.
“Home loan lenders in India are a very conservative lot and take lending risk levels very seriously. To evaluate and approve home loan applications, banks rely on CIBIL scores. An individual’s CIBIL score is based on a record of his or her credit history, and factors in data drawn by CIBIL from all Indian lending institutions,” says Anuj Puri, chairman of the consultancy JLL Residential. “The objective of these scores is to establish the person’s historic payment behaviour, which is considered a reliable indicator of his or her likely payment behaviour in the future.”
So how is the CIBIL score calculated?
“Past performance on debt obligations contributes about 30% weightage to the score; type and duration of loans taken in the past contribute 25%, total amount of credit exposure accounts for another 25% and other factors like credit utilisation and recent credit behaviour constitute the remaining 20% of your score,” says Hrushikesh Mehta, a vice-president at CIBIL.
If an applicant is over-leveraged, already servicing a number of other loans or has an erratic credit card repayment history, this ranking will be negatively impacted and may result in refusal to grant a home loan. “For this reason, it is important for aspiring home loan borrowers to maintain a clean credit repayment record in all respects,” advises Puri.
It may not always be about non-payment.
“Even if you have not defaulted but there is some adverse record against your name because of an error, your ability to get a home loan can be affected,” says Harsh Roongta, a chartered accountant and SEBI-registered investment advisor. “Before one considers a home loan, one should take a look at one’s credit report. If there is an issue, contact the grievance cell of the bank or finance company concerned and get the error rectified and your record cleared.”
For those who have defaulted, there is no magic wand to clean up your credit history. “First of all, pay off the defaults. Get a new credit card secured against an FD and use it regularly to build a new payment record, which will gradually reflect in your payment history. It will take up to three years to scrub an adverse history,” says Roongta.
Be in the know
As a rule, ensure that you pay EMIs on personal loans and pay your credit card bills by the due date every month. “Regular payment will help you build a high CIBIL Score and a healthy CIBIL report,” says an HDFC spokesperson.
A higher concentration of home loans or auto loans (commonly known as secured loans) is likely to be more favourable for your credit score than a large number of unsecured loans (personal loans). “Monitor your co-signed and joint accounts monthly. Defaults in payments on co-signed and jointly held loans also impact your credit score,” the spokesperson adds.