Improve credit score before applying for home loan

In this age of risk-based pricing of credit, the credit score has become a very im portant number in your financial life.This number determines whether you get a loan at all and, if so, at what interest rate (even a 1 percentage point difference in interest rate can have a significant impact on your interest outgo over the tenure of the home loan).

Before you apply for a home loan, you need to first get a credit report from one of the country’s four credit bureaus. The credit report contains your credit score, which ranges from 300 to 900. A score below 600 is deemed average or poor and requires improvement. Below are a few steps you can take to improve your credit score.

Review your credit report: In the period prior to taking the home loan, you should review your credit report regularly. Arun Ramamurthy, co-founder of Credit Sudhaar, a credit improvement company, suggests re viewing your credit report every month.Such reviews will help you identify which areas you need to improve in. And once you have initiated the actions required to improve your credit score, you will be able to monitor whether you are making any progress.

Get errors in report rectified: One reason for a poor credit score could be an error in your credit report. This will be revealed when you review your credit report. If you identify the error early, you can get it rectified without much damage to your credit score.

Errors in credit reports occur due to mistakes in the data submitted by the lending institutions, or the credit bureau’s algorithm mistakenly attributing a loan or credit card to you when it was taken by another person with the same name, or due to identity theft (where someone fraudulently uses your identity to take a loan).

When you identify an error in your credit report, call the customer care centre of the lending institution and file a complaint. Get a complaint number. Send a mail with reference to the complaint number and details of the issue to the grievance redressal officer of the lending institution. Send a copy of this mail to the credit bureau concerned.You should get a response within 30 days of your communication to the grievance redressal officer, stating that the desired correction has been made. Forward this response to the credit bureau so that it can do its own rectification.

Develop a healthy cred dit mix: People often think that if they have not taken loans or credit cards in the past, they should have a good credit score. This is not true. “If you don’t have previous loans or credit accounts, the credit bureau has limited data for scoring you, and will hence give you a low credit score,“ Ramamurthy says.

The ideal credit mix depends on a person’s financial background and life stage.Nonetheless, as a general guideline, you should have one secured term loan (home, car, etc), one unsecured term loan (personal loan), and three credit cards.

Experts suggest that you should start your credit life early and build a good credit history over time.

This will pay off when you have to take a large loan, such as a home loan. Don’t overuse credit limit: You should also be careful about the credit limit that you exhaust. Try not to exceed 40% of the credit limit on your credit card.

Correct past mistakes: If you have defaulted on a loan taken in the past, then you need to take corrective action to improve your credit score. You need to tighten your belt, cut out unessential expenditures altogether, and try to reduce your essential expenditures as much as possible, so that your expenses are lower than your income.

You may also request your lenders for help. Instead of running away from the situation, contact your lender and inform him about the situation. You could request the lender to reschedule the payment. If you have a large outstanding loan, of say Rs 1 lakh, the bank could extend the deferred payment facility to you. In other words, it could allow you to repay this amount in four months instead of at one go.

The bank could also offer an interest moratorium. Once the amount to be paid and the date of payment have been decided, the account no longer attracts further interest or penalty.

Sometimes the lender could restructure the loan. In other words, it could increase your loan tenure and reduce your EMI.Home Loan

Seek professional help: Those who lack the time, patience and energy to do all this themselves may seek the help of a credit repair company. Such organizations offer credit counselling and can help you with things like debt settlement, removing inaccuracies in your credit report, and improvement of credit score.

Choose a company that has been in existence for at least three years. The company should sign a contract with you. Avoid players who make outrageous promises, as improving the credit score takes time and can’t be accomplished overnight.

Source: TOI 07 Nov’2015