How to improve your credit score for your home loan approval

As a prospective home buyer considering a home loan, you would have read about how banks or housing finance companies consider your credit score for your home loan approval. At this stage, it becomes mandatory for you to check your credit score and in the case of a low score, take up measures to improve it. Wondering how to improve your credit score? Here is what you need to know.

What is credit score?

A credit score is an assessment of your financial performance. It takes your transactional history into account to validate your credibility for credit approval.

Here is a brief overview of what your credit score depends on:

• Repayment history- Have you paid off your debts within the stipulated time?
• Credit sources- Any lines of credit you have and the credit limit for each.
• Credit history- How long have you been using credit for?
• Credit application- How frequently do you apply for new credit?
• Types of credit- The different types of credit you own such as credit cards, retail accounts, loans etc.

This information is recorded in your credit report generated by credit bureaus.

Banks refer to your credit report before processing your loan application

Why is it important for your loan application?

Banks check credit score before processing a loan application. A good credit score is an indication of your repayment ability and trustworthiness. Before you apply for a home loan, it is better to get your credit score checked. You can apply to a credit bureau such as CIBIL, Experian, Equifax, or High Mark. Banks supply the data of your transactional history to these firms, and they prepare a credit report based on the above parameters.

A good credit score is usually above 750 and is ideal for your loan approval.

How to improve your credit score?

Get your credit report

Your credit report contains all the data related to your transactions and credit applications. A low credit score is usually due to an imbalance in the parameters used to calculate your credit score. With your credit report in hand, you can analyse how to increase your credit score.

Clear your dues on time to maintain a clean credit record

Pay your bills on time

Although it seems like a simple tip, it is very important to pay your bills, EMIs, or credit card dues on time. This goes a long way in building your credit score.

Keep your credit dues low

It is always a good practice to keep the balance amount you owe below 50% of each card’s limit. Another crucial tip is to make more than the minimum payments on your credit dues. Paying more than the minimum helps in clearing your dues faster and will help to improve credit score.

Timely debt repayment is an achievement that needs to be included in your credit report

Leave good debt on your report

Do not try to remove any debt that you paid off from your credit report. Good debt that is paid off in time is good for your credit score and reflects your excellent repayment record. It is not the absence of debts but the timely repayment that pays off and improves your credit score.

Avoid big purchases right before your loan application

Any big purchase that you finance through credit can put a big dent in your credit score. Home finance companies or banks are usually apprehensive when they see sudden changes before approving your home loan.

Prospective home buyers should remember that improving credit score is a process that takes significant time. So it is better to start off early. Consult a financial advisor in case you need specific tips to improve your low credit score.