Having a good credit score is super important, especially if you want to get a home loan. Your credit score isn’t just a number—it’s like a key that opens doors to better deals. It decides whether you can get a loan for a house and also influences how good the terms of the loan will be, like the interest rate and how you can pay it back.
If you want to gain a clear understanding of your credit scores and their impact on securing home loans, this article is a must-read.
Save Lakhs on Your Home Loan with a Higher Credit Score!
Understanding Credit Scores
The most commonly used credit scores are based on the FICO (Fair Isaac Corporation) scoring model, but there are other models as well, such as Vantage Score.
Generally, FICO scores are calculated based on the following factors:
| Factors | What Do They Mean? |
|---|---|
| Payment History (35%) | This factor assesses whether you have made payments on time, including credit cards, mortgages, and other loans. |
| Credit Utilization (30%) | This measures the ratio of your current credit card balances to your credit limits. Lower utilization is generally better. |
| Length of Credit History (15%) | This considers how long your credit accounts have been active. A longer credit history is typically viewed more favorably. |
| Types of Credit in Use (10%) | Lenders like to see a mix of different types of credit, such as credit cards, installment loans, and mortgages. |
| New Credit (10%) | Opening several new credit accounts in a short period may be seen as risky behavior and can negatively impact your score. |
Range of Credit Scores and Their Implications
Credit scores typically range from 300 to 850. The breakdown of score ranges is generally as follows:
| Rating | Score |
|---|---|
| Poor | 300 -579 |
| Fair | 580 – 669 |
| Good | 670 – 739 |
| Very Good | 740 – 799 |
| Excellent | 800 – 850 |
The higher your credit score, the more likely you are to be offered favorable terms on loans and credit, including lower home loan interest rates and higher credit limits.
Factors Influencing Credit Scores
Credit scores are influenced by various factors. Understanding these can help you maintain or improve your score.
| Factors | What Do They Mean? |
|---|---|
| Payment History | Timely payments have a significant positive impact, while late payments, defaults, and bankruptcies have negative effects. |
| Credit Utilization | Keeping credit card balances low relative to credit limits is beneficial. |
| Length of Credit History | A longer credit history is viewed more positively. |
| Types of Credit in Use | Having a mix of credit types can be advantageous. |
| New Credit | A longer credit history is viewed more positively. |
| Public Records | Bankruptcies, tax liens, and civil judgments can significantly impact your credit score negatively. |
| Hard Inquiries | Applying for new credit results in hard inquiries, which can have a small negative impact on your score. |
Impact of Credit Scores on Interest Rates
Credit scores play a crucial role in determining the interest rates offered by lenders. The relationship between credit scores and interest rates is generally inverse; interest rates tend to decrease as your credit score increases, and vice versa.
- Higher Scores = Lower Interest Rates
- Lenders use credit scores as a risk assessment tool. Borrowers with higher credit scores are considered less risky, leading to lower interest rates.
How Credit Scores Affect the Overall Cost of a Home Loan?
The impact of credit scores on the overall cost of a home loan can be substantial. A lower interest rate can result in significant savings over the life of a mortgage. Even a seemingly small difference in interest rates can translate into thousands of dollars in savings.
Example:
- Borrower A with an excellent credit score might qualify for an 8.5% interest rate.
- Borrower B with a fair credit score might qualify for a 9.5% interest rate.
Result: Over the life of the loan, Borrower A would pay much less in interest compared to Borrower B. This illustrates how a higher credit score can lead to lower interest rates, reducing the total cost of borrowing.
Get a Home Loan
with Highest Eligibility
& Best Rates
Key Strategies for Improving Credit Scores
- Check and Correct Credit Reports: Regularly review your credit reports from major credit bureaus to ensure they are accurate and dispute any errors you find.
- Pay Bills on Time: Timely payment of bills, including credit cards, loans, and utilities, is crucial for maintaining a positive payment history.
- Reduce Credit Card Balances: Try to maintain low credit card balances compared to your credit limits. High balances can harm your credit utilization ratio.
- Avoid Opening Too Many New Accounts: Opening multiple new credit accounts in a short period can lower your average account age and potentially harm your credit score.
- Diversify Credit Types: Having a mix of credit types, such as credit cards, installment loans, and mortgages, can be beneficial.
- Negotiate with Creditors: If you’re struggling with payments, consider negotiating with creditors to set up a payment plan or settle outstanding debts.
- Use Credit Wisely: Be strategic about how you use credit. So that you can avoid maxing out credit cards, and only apply for credit when necessary.
- Seek Professional Advice: If your credit situation is challenging, consider consulting with a credit counseling agency for guidance on improving your financial standing.
Interest Rates Comparison
Here is a table summarizing the top home loan bank partners with their respective interest rates and maximum tenures:
| Bank | Up to Rs. 30 Lakh | Above Rs. 30 Lakh to Rs. 75 Lakh | Above Rs. 75 Lakh |
|---|---|---|---|
| SBI Bank | 8.5% p.a. onwards | 8.5% p.a. onwards | 8.5% p.a. onwards |
| HDFC Bank | 8.7% p.a. onwards | 8.7% p.a. onwards | 8.7% p.a. onwards |
| LIC Bank | 8.50% – 10.35% p.a. | 8.50% – 10.55% p.a. | 8.50% – 10.75% p.a. |
| ICICI Bank | 8.85% p.a. onwards | 8.85% p.a. onwards | 8.85% p.a. onwards |
| Kotak Mahindra Bank | 8.70% p.a. onwards | 8.70% p.a. onwards | 8.70% p.a. onwards |
| Punjab National Bank | 8.40% – 12.10% p.a. | 8.40% – 12.10% p.a. | 8.40% – 12.10% p.a. |
| Bank Of Baroda | 8.40% – 10.65% p.a. | 8.40% – 10.65% p.a. | 8.40% – 10.90% p.a. |
| Bajaj Housing Finance | 8.50% p.a. onwards | 8.50% p.a. onwards | 8.50% p.a. onwards |
| Axis Bank | 8.75%-13.30% p.a. | 8.75%-13.30% p.a. | 8.75%-9.65% p.a. |
| Bank of India | 8.4% p.a onwards | 8.4% p.a onwards | 8.4% p.a onwards |
| TATA Capital | 8.75% p.a. onwards | 8.75% p.a. onwards | 8.75% p.a. onwards |
You can check out Credit Dharma’s home loan eligibility calculator to determine the loan amount you are eligible for based on your income.
Conclusion
Credit scores aren’t just about home loans; they influence opportunities like credit cards, auto loans, and insurance. So, managing and understanding your credit profile is crucial for achieving your financial goals, especially for those aspiring to own a home.
As we approach 2024, the home loan approval landscape is changing. So, this is emphasising the need to stay informed and proactive in handling credit scores for a secure financial future.
Stay Ahead with Credit Dharma! Get expert guidance and tools to improve your credit score and secure your financial future. Visit Credit Dharma today!
Frequently Asked Questions
You have a good chance of getting a home loan if your CIBIL score is between 650 and 749, and an excellent chance if it is 750 or above.
Yes, a lower CIBIL score may lead to rejection or higher interest rates. So, a higher score helps secure better loan terms.
The most common is FICO Score 5 in the mortgage industry, with lenders pulling histories from all three major credit agencies. So, FICO Score 2 or 4 may also be considered.
Credit Dharma services are entirely free of charge for customers. However, there might be occasional one-time home loan processing fees and other minor charges, which vary among lenders.
HDFC Home Loan
SBI Home Loan
