Renowned American business journalist, Jean Chatzky, once said, “If you default on an unsecured debt, you won’t lose anything (except points on your credit score).”

This sums up the relevance of a credit score. It’s the report card of your credit history and creditworthiness that proves your credibility when you approach a lender for a home loan. It shows your track record of repaying a loan or paying off a credit card bill and works as a passport to an easy loan or a credit facility.

Rising demand for loans

The Reserve Bank of India’s Financial Stability Report, released in July 2023, said the share of residential housing loans in total advances in the last 11 years jumped to 14.3 per cent as of March 2023 from 8.6 per cent in March 2022.

With such a high rise in home loan demand, and keeping in mind that home loans are high amounts and long-duration, it’s the prerogative of lenders to check a loan applicant’s credit history. No tool is better than the credit score to gauge it.

A higher credit score helps you get a home loan quickly and at a favourable interest rate. The range for the credit score is 300–900.

A credit score below 600 is considered low; 650–699 is rated satisfactory or fair; 700–749 is good; and 750–900 is excellent. With a credit score of 750 and above, you have the best chances of getting a home loan at favourable terms.

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The most important calculation

The credit score is calculated on the basis of your repayment history, which contributes 35 per cent of it; credit balance and utilisation forming 30 per cent; duration of availing of credit making 15 per cent, and new credit and credit mix making 10 per cent each of your score. You need to maintain all these parameters at a good level to attain a healthy credit score.

Monitoring your credit utilisation ratio, not cancelling credit cards, and checking your eligibility before taking a loan are some of the effective tools to maintain a healthy credit score.

Keeping tabs on credit history, taking one loan at a time, making loan repayments on time, and not delaying credit card payments are equally effective measures for a good credit score.

Credit utilisation: The know-how

While focusing on credit history, maintaining credit utilisation is also an art. Credit utilisation is the revolving credit offered on your credit cards. The recommended credit utilisation ratio is 30 per cent or below.

It means if the total limit of your credit card is Rs 1 lakh, your total outstanding on it at any point should not exceed Rs 30,000. Such a low credit utilisation ratio makes credit agencies believe that you are good at managing your spending and credit within the limit.

It, in turn, increases your credit score and your chances of getting a home loan.

Defaulting on loan repayments or failing to pay credit card bills or EMIs on time spoils your credit report, as a credit agency downgrades your credit score in such cases. A chequered credit history poses problems when you approach a lender for a home loan or apply for a credit card.

It is advisable that you assess your home loan repayment capacity before getting it sanctioned. Check to see if your current and future income can make you repay the home loan on time. Also, keep your credit limit much lower than your monthly salary as you most likely won’t default on the monthly bill.

Financial discipline is a must!

When we talk about maintaining a healthy credit score, the importance of financial planning comes to the fore. Small practices such as preparing a monthly budget to meet your expenses, making loan repayments, and paying your credit card bills can come in handy.

They may help you not overspend and keep money reserved for all necessary expenses. Another arrangement for a healthy credit score can be to have an emergency fund. It will prevent you from relying on credit in times of unexpected expenses.

As they say, good habits are inculcated over time and nurtured gradually. Building and maintaining a healthy credit score is one such art. It saves you from defaulting on unsecured debt, helps maintain a healthy credit score, and paves your way to getting a favourable home loan.

This article has been written by Atul Monga, CEO and Co-Founder, Basic Home Loan. Views are personal.