Take a mortgage? Check the impact of credit scores on your mortgage costs

This is a number that varies between 300 and 900 and is calculated by rating agencies like CIBIL and Experian.

Did you know that your credit score is taken into account in determining the interest rate on your loan? The higher your score, the lower the interest rate on your loan will be and vice versa. For example, a leading government bank charges a 10 basis point premium to mortgage borrowers with poor credit scores. This is why knowing your credit score is essential because it has a direct impact on your financial health. Let’s discuss some important points related to credit scores.

What is a credit score?

This is a number that varies between 300 and 900 and is calculated by rating agencies like CIBIL and Experian. If you take out a loan or credit card from a bank or financial institution, your lender sends details of your repayment to the credit bureaus on a monthly basis. Credit agencies use this information to compile your credit history and determine your credit score. Disciplined repayments help raise your credit score, while late or incomplete payments lower your score. Whenever you apply for a loan, your lender takes your credit rating into account to assess your creditworthiness. If your credit score is over 750, you are likely to get good loan deals.

Credit score linked to loan interest rate

Banks want to understand the risk of lending you money. They check your credit history, which includes your credit score, to find out. Your credit report contains details of all of your past credit card loans and repayments. If you have paid off all your loans on time, your bank will consider you a responsible borrower and may therefore offer you lower interest rates. But if you have defaulted on a loan or have an uneven repayment history, your bank will charge a higher interest rate to mitigate the risk of additional loan, resulting in higher EMIs for you. Consult the table to find out how your credit rating could affect your mortgage costs:

Know your credit rating

Search the Internet for “Free Credit Score” to go to any financial website where you can check your credit score for free repeatedly after entering your PAN and phone number. You can also visit the websites of credit bureaus and download your free credit report once a year.

If you are considering taking out a loan, check your credit score before applying to avoid unpleasant surprises. If you’ve managed a loan or used a credit card, check your credit report regularly to determine the impact of your repayments on your credit score. You should also check your credit score if you are guarantor of someone else’s loan. If you’ve never taken out a loan, been a loan guarantor, or used a credit card, you won’t have a credit score. If so, there is nothing to worry about. When you take out a loan, your credit history will start to build up, which will be reflected in your credit score.

How to improve your credit score

If you don’t have a credit history, you can apply for a basic credit card or even make a purchase on EMI to develop it. If you are not eligible for a credit card, check to see if you can get one against your fixed deposit. This facility is offered by the majority of banks. Once you have a good credit history and credit score, paying off your card or loan on time will increase your score.

You can set standing instructions for the automatic debit of your credit card or EMI loan contributions to ensure timely repayments, save on penalties, and improve your credit score. But use your credit card with care and avoid regularly using more than 30% of your spending limit. When you make a large purchase with your credit card, pay it off as soon as possible. Failure to do so will result in a drop in your credit score. The older your credit history, the better your credit score, as it indicates that you are handling your long-term credit commitments responsibly.

Try not to miss a single loan repayment even if you are going through a temporary financial crisis, as a default or a settlement is likely to hurt your credit score. If you notice any errors or discrepancies in your credit report, contact the credit rating agency as soon as possible for correction. As such, make it a habit to check your credit score on a monthly basis.

(The author is CEO, BankBazaar.com)

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