A credit score is a crucial factor that determines whether your home loan application is going to be approved or not, the amount of loan to be sanctioned, and the home loan interest rate that you will get. The credit score has a significant impact on your interest rates. A credit score is a 3 digit numerical score that summarizes your credit history. It indicates your financial discipline and your creditworthiness. A lower credit score means a higher credit risk, and this will lead lenders to charge you with a higher rate of interest for your home loan. On the other hand, a higher credit score will fetch you an affordable and lower interest rate. The home loan interest rate depends on a variety of factors, such as loan to value, gender, and the borrower’s credit score. While other factors usually do not affect the home loan interest rate during the loan period (assuming that the bank’s interest rate does not vary), a change in the credit score will lead to a variation in the interest rate even during the loan’s tenure.
How Does Interest Rate Vary With Different Credit Scores?
Each bank has its own range of credit scores according to which the interest rate differs. Also, it will vary depending on the loan amount. Check the table below to understand how the home loan interest rates vary with different credit scores.
|Banks||<=700||>700 to <=750||>750<=800||>800|
|Bank of Maharashtra||6.80 to 7.80||6.50 to 6.80||6.40 to 6.50||6.40|
|PNB||6.85 to 7.80||6.50 to 7.20||6.50 to 7.0||6.50 to 7.0|
|SBI||6.80 to 6.90||6.70 to 6.80||6.70||6.70|
|UCO||6.70||6.50 to 6.70||6.50 to 6.60||6.50 to 6.60|
|PNB Housing||8.55 to 9.75||7.50 to 8.60||6.75 to 7.95||6.75 to 7.75|
|LIC Housing||6.75 to 8.05||6.70 to 7.50||6.70 to 7.50||6.70 to 7.50|
|Union||6.85 to 7.40||6.60 to 7.05||6.60||6.60|
|BOI||6.70 to 8.35||6.60 to 6.70||6.50||6.50|
How Does A Poor Credit Score Affect Current Borrowers?
When you have already borrowed a home loan, a decrease in your credit score could lead to a rise in your interest rates. For instance, at the time of taking the loan, your credit score was 750, and the interest rate offered to you was in the range of 6.50 to 7.20. Later, the credit score drops below 700, and the interest rate offered is now in the range of 6.85 to 7.80. This is according to the range in which your new credit score falls. According to the Reserve Bank of India (RBI), “Banks have the freedom to determine the spread over the external benchmark. But, the credit risk premium may undergo change only when the borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract.”
Lending institutions monitor the borrower’s credit score at least once a year and adjust the borrower’s interest rate. If the credit score is seen to fall during the review performed by the bank, the applicable interest rate on the loan may go up. If the score is shown to increase, then the home loan interest rate may be lowered. Some banks might increase the interest rates only when there is a fall of 50 basis points or higher. The most important thing to keep in mind is to maintain a good credit score before you apply for a home loan and during the entire repayment tenure to avoid an increase in the home loan interest rate.
How To Improve Your Credit Score?
These are some of the ways in which you can improve your credit score.
- Check your credit report regularly: One of the essential things that you must do to improve your credit score is to check your credit report. This will help you to identify the errors in your report. If you find any discrepancies in your report, you must correct them immediately. The credit score is computed based on the information present in the credit report, and it is very important for you to ensure that the report is free of errors. Do a free credit score and credit report check at CreditMantri.
- Clear Your Outstanding Bills: If you have any outstanding credit card bills or loans, you must pay it off immediately to improve your credit score. Credit history is one of the factors that is taken into consideration when computing the credit score. If your credit history shows many defaulted payments, it will hurt your credit score. It will be convenient to activate payment alerts or an auto-debit facility to ensure that you always pay your credit bills or EMIs on time. Also, avoid paying only the minimum amount due on your credit card always as it will increase the outstanding balance.
- Credit utilization: This is another major factor that is considered while computing the credit score. The ratio of the amount of revolving credit utilized to the amount of revolving credit available is called the credit utilization ratio. Experts always advise keeping your credit utilization ratio below 30%. So, if you have multiple credit cards, keep track of how much money you are using on credit.
- Do not eliminate old accounts from your report: Getting old accounts removed from your report may be detrimental to your credit score as they may have a good repayment history.
- Do not apply for too many loans or credit cards: Applying for multiple loans or credit cards will show you as credit hungry with the lenders. Also, each time you apply for a loan or credit card, there will be a hard inquiry, and multiple hard inquiries will bring down your credit score.
- Consolidate your debts: If you have too many debts, you could consolidate them into one single debt by taking a debt consolidation loan. You have to make only one EMI payment now, and this will show it as a single loan on your credit report. Also, it will help you track your finances and your EMIs with ease
It is always essential to improve and maintain your credit score. This will help you get the best and most affordable home loan interest rates from the top lending institutions.