A good credit score can get you loans at lower interest rates; Here’s how

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Updated: Feb 25, 2020 1:17 PM

The creditworthiness of an applicant is determined by their credit score. With most banks opting for risk-based pricing of loans, creditworthy applicants are being charged lower credit-risk premiums.

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Maintaining good credit habits lead to big savings. When opting for a loan, the interest rates that banks charge from a borrower are influenced by the borrower’s credit profile. Most banks categorize borrowers based on their credit score and charge different credit-risk’ premiums based on these categories. Banks largely use the credit scores assigned by credit bureaus to a borrower to determine the category they fall into.

The creditworthiness of an applicant is determined by their credit score. This is because borrowers with a good score have a higher probability of making the loan repayments timely. With most banks opting for risk-based pricing of loans, creditworthy applicants are being charged lower credit-risk premiums.

In case of home loans, banks like Bank of Baroda, Union Bank of India, Bank of India, UCO Bank and Syndicate Bank use credit scores to decide the risk premiums of floating-rate home loans. Hence, if you have a credit score 760 or above, which is considered very good, Bank of Baroda will currently offer you a home loan at 8.15 per cent, which will increase by 0.25 per cent, if your credit score falls below 760, bringing the final rate to 8.40 per cent. The bank will add an additional 1 per cent, if your credit score is below 725, bringing the final interest rate to 9.15 per cent.

Other than this, various banks also use their internal consumer ratings and other parameters to determine risk premiums of a borrower. However, even in such cases, the credit score remains vital in determining the risk premium.

Here is how to maintain credit score:

Credit score keeps changing based on your borrowing and repayment history. Hence, the interest rate that you are offered at a point will also change over time, as it is linked to your credit score. The interest rate that is offered at the time the loan is disbursed will not remain fixed at the initial rate. If you wish to maintain the same interest rate, you have to make sure your credit score does not fall substantially during the loan tenure.

Experts say even for a short-term loan, fluctuations in the credit score have an adverse effect on borrowers. If a borrower’s credit profile changes substantially, banks can change the interest rates under the external benchmark system. The credit scores of borrowers are typically checked by banks on a quarterly basis.

Any drastic change in the credit score of a borrower can lead to a change in the loan rate, even after the loan has been taken.

To maintain a good credit score, make payments on time for all availed credit, be it a credit card or a retail loan. Experts say borrowers should try to maintain a healthy debt-to-income ratio, and avoid applying for credit from multiple lenders at the same time, to maintain a good credit score.

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