Interest rates linked to credit scores are now a reality. You stand to gain if you can boost your credit score.
Public sector major Bank of Baroda (BoB) recently announced its decision to charge a lower interest rate to home loan borrowers with favourable credit scores. Those with credit scores of over 760 will be charged 8.35% per annum, the lowest in the industry, the lender said.
A credit score is generated by credit information companies like CIBIL, Equifax and Experian after collecting credit history details from lenders. It is an indicator of the loan applicant’s credit-worthiness – the higher your score, the better are your chances of obtaining the loan, as majority of credit is extended to those with a credit score of over 700. While the underlying premise of the credit information system is to reward borrowers with a good repayment record, home loan borrowers had been deprived of the benefits so far. Most banks continue to charge standardised interest rates for all home loan seekers, irrespective of their credit scores. Its utility so far was largely limited to banks that used it as one of the determinants to approve or reject loan applications.
BoB’s move, however, could finally spark off a trend that will lower the interest rate burden for borrowers who diligently meet their EMI commitments. If the trend catches on, such borrowers will stand to benefit.
While discharging your EMIs as per schedule is the surest way of obtaining high credit scores, you also need to know other parameters that can help you achieve it:
1. Avoid too many loan applications
If you have applied for several loans or credit cards with several lenders, it could adversely affect your credit score. You would be seen as a ‘credit hungry’ individual constantly on the look out for loans. This is applicable for credit cards applications in particular, where individuals tend to give in to the temptation to sign up for credit cards that dole out discounts and offers.
2. Tilt towards secured loans
While several credit cards could raise banks’ suspicions, a higher proportion of secured loans, that is the ones backed by collateral assets, could quieten their concerns as they can bring about a balance in the borrower’s loan portfolio. So, if you have to borrow, look for a secured loan like loan against jewellery, investments, life insurance policies and so on, so that unsecured loans like personal loans or credit cards do not corner a major part your portfolio. Credit score aside, preferring secured loans over unsecured ones like credit card or personal loan is a sound strategy as the former carry relatively lower interest rates.
3. Keep an eye on credit limit
If you are a swipe-happy, compulsive shopper constantly clocking high credit card usage, it is likely you come close to breaching your credit limit often. High utilisation of the sanctioned limit, too, could dent your credit scores even if you have been paying your bills on time.
4. Pay your utility bills on time
It’s not only your loan repayment track record that matters, but also your bill payment history. If you have not paid your electricity or mobile phone dues, again your credit score will suffer.
5. Check your credit reports regularly
Finally, make sure you keep a tab on your credit score and report regularly. You can get the details from credit information companies for free once in a year. It will help you weed out any discrepancies that can unfairly lower your credit score by bringing them to the credit bureaus’ notice.