Before applying for a home loan, make sure that your credit score is high. If it is not, find out how you can improve it.

Significance of credit score

After your income and ability to repay, your credit score is the most important determinant of whether you will receive a loan, and if so, at what interest rate. Four credit bureaus within India prepare credit reports: Experian, Equifax, CIBIL and Crif High Mark. The credit score is a numeric summary of all the positives and negatives in your credit report, which in turn is based on your past behaviour as a borrower. Before applying for a home loan, approach one of the four bureaus and get a credit report to know where you stand.

The Fixes

If your credit score is not in the excellent grade, a few steps will help improve your score in the short run. There may be a personal or credit card loan that you have paid off, but your bank may not have updated its records. Get that mistake rectified. Sometimes, loans become delinquent due to a disagreements between the lender and the borrower. Resolving the dispute, paying off your dues and closing the loan account will lead to an immediate improvement in your score.

Next, check your payment position vis-a vis all your loans. If you have missed out on a payment due to oversight, make amends. Consolidating your debts is another useful step. If you have four personal loans, club them into one. Consolidating your debt will make it easier for you to remember when your payments are due. Moreover, your credit report will show that you have taken one loan and not four, signifying that you are prudent.

If you have been revolving your credit card dues, stop doing so as the interest rate on these loans is the costliest. Take a personal loan and repay your credit card dues.

Longer term changes

The most important behavioural change you can make over the long term is to pay all your dues on time. Also, alter the profile of your loans. If you have a higher proportion of unsecured debt over secured, create a balance between the two types

Be judicious while applying for loans. Every time you apply, the bank makes an enquiry with the bureau. Too many enquiries affect your score adversely as they signal that you are credit hungry. Finally, don't overuse your credit limit. If you have a limit of `1 lakh on your card, don't use it to the hilt.

If, despite implementing the above suggestions your credit score doesn't reach a satisfactory level, approach a professional agency. More than 70 parameters go into determining your credit score. A professional agency will put all the information about you in its analytics engine and come up with scientific answers on what is the right balance for you in terms of credit mix, number of credit cards you should have, percentage of credit utilisation that is judicious, and so on.

Take the help of an agency that helped him improve his score from 676 to 777. Armed with it, he was able to transfer his loan to a bank that agreed to lend to him at 10.25%--100 basis points lower than his previous rate. The lower rate will translate into a saving of around `8 lakh in interest cost over a 20-year period. In this era of risk-based pricing, it indeed pays to focus on that three-digit number called the credit score.

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