In today's world where real estate prices are skyrocketed, almost all of us need a Home Loan. But did you know that your credit score is by far the most important factor on which Banks and Non-banking finance companies (NBFC) rely? And the good news is you can keep your credit score in check, let's see this in today's article.
Before jumping onto that, for the uninitiated, a credit score is a 3-digit number between 300-900 given to a bank account holder (usually we think it can only be given to a credit card holder). These scores are given by various credit rating agencies like CIBIL, TransUnion, Experian, Equifax, or CRIF High Mark. Every company uses its own algorithm to arrive at the credit score, but the component used by all of them is the same. A credit score of 750 or above is considered an ideal score, you fall below that and you are gonna face a hard time for a loan of any type.
Now let's look at the components below, one by one in detail :
1) Payment History (High Impact)
This is the most important factor in calculating your credit score. It basically assesses if you pay your credit card bill or any small loan EMI that you have taken. If you aren't paying small loans on time, then it is likely that you will default on big-ticket loans. This also proves why is this the most important factor. So in all, you shouldn't, in any case, miss that small EMIs or that credit card bill.
2) Credit Utilization (High Impact)
This suggests how much credit you have used against the credit available to you. It is calculated by dividing the outstanding balance by your total credit limit. And it is not compulsory that only credit cardholders are ranked in these, nowadays even debit card has a limit and yes you can a small-ticket loan on that. Experts suggest that you should keep it between 30-40%, or use only 30-40% of the credit available to you.
3) Age of the Credit (Medium Impact)
This factor has a medium impact on your credit score unlike the two mentioned above, but nonetheless, it is important to know. It is nothing but your history with buying credits. The more you take loans and pay them back on time, the better. That doesn't mean you should exhaust your limit, but as mentioned above keep it between 30-40%. The credit limit resets after you have made all the payments.
4) Total Accounts (Low Impact)
So this is basically how many credit accounts you have at a time and is it secured or unsecured. Like a credit card or debit card loan is an unsecured loan type, whereas a car loan or home loan is a secured loan. Although this has a low impact, you should watch out for this, as this shows how you handle both types of credit.
Phew..!!! we know that was a lot to digest, but if you want to get a home loan or any type of loan for that matter, you do need to keep the above things in mind.
Did you know India's rating was changed recently by Moody's from negative to stable? Let us know in the comments if you want to know how these scores affect the countries.
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Disclaimer
The above information is to spread financial literacy. We are not SEBI registered financial advisors, kindly consult your financial advisor before making any investment decision.
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