Until a few years ago, most people were unaware of how banks would evaluate their eligibility for a loan. Today, lenders are not only becoming increasingly transparent about their home loan underwriting processes but they are also rewarding those consumers who have demonstrated good credit behaviour—a CIBIL score of 750 or higher.
Preferential pricing is beginning to take root as the new mantra. This paradigm shift has been led by several public sector banks, giving this an added impetus. All have announced discounted rates on home loans for consumers with a CIBIL Score above 750. A moot point is that this paradigm shift is more visible in the housing loan space, with one bank having incorporated it in the retail loans space. However, it is but a matter of time before this concept gains traction across loan segments. Before the existence of credit bureaus, lenders lacked the ability to identify payment behaviour until the consumer developed a track record with that lender. That has changed with the wide usage of credit bureaus in the last decade.
A credit score ranges between 300 and 900, and helps lenders assess the probability of default of a borrower. A high score indicates credit-discipline and a higher probability of loan repayment. Hence, consumers with a high score have a better chance of getting a loan and can use this to negotiate a better deal with lenders.
However, if your score is under 760, you will have to work towards building a better credit profile. Here are some tips to help you on your journey to better credit health:
Build a positive credit profile:
Start small: Timely payments on a consumer durable or a short-term loan helps build a positive credit footprint—the EMIs are lower in amount and the loan period is shorter, making it easier to repay.
Apply for new credit in moderation: Lenders will be wary of a sudden increase in credit appetite.
Maintain healthy credit footprint
Pay your dues on time: Late payments are viewed negatively by lenders.
Keep your balances low: Control your utilisation.
Maintain a healthy mix of credit: It is better to have a healthy mix of secured (such as home loan, auto loan) and unsecured loans (such as personal loan, credit cards). Too many unsecured loans may be viewed negatively. Monitor your co-signed, guaranteed and joint accounts: You may be surprised to know that you can be held equally liable for others’ negligence (such as missed payments) in co-signed, guaranteed or jointly held accounts. So keep track of loans and other accounts that you may have guaranteed.
Review your credit history frequently throughout the year: Monitor your credit score and report regularly to avoid unpleasant surprises in the form of a rejected loan application. So start tracking your credit profile regularly and working towards a higher credit score to avail of score-based preferential pricing discounts and loan offers when the opportunity arises.
The writer is VP & head, Direct to Consumer Interactive, TransUnion CIBIL