You might know that you must have a good credit score to avail a home loan. However, not many know that a home loan can affect your credit score too. You can expect changes in your credit score based on how you repay your home loan. Read more to find out how.
What Is a Credit Score?
The credit score is a numerical representation of your creditworthiness. It is measured between 300- 900, where 300 is the lowest, and 900, the highest. The higher the score, the better. The credit bureaus determine your credit score based on your repayment history, total credit balance, the total number of loans and credit cards and your credit utilisation ratio. You need a credit score of at least 700 and above to avail a home loan in India.
Impact on Credit Score When Availing a Home Loan
- Adds to your credit score
When you take a home loan, it initially hits your credit score, and you might feel that it is dipping. However, the credit score is based on your ability to repay, and thus it bounces back when you make timely home loan EMI payments. The tenure of 20 years is enough time for you to build the credit score if you do not default on your debt repayments.
- Helps maintain credit mix
When you avail a home loan, it helps you maintain the credit mix required for a good credit score. Experts opine that you should have a credit mix of instalment credit and revolving credit. While the most common example of revolving credit is a credit card, personal loan, car loan, or home loans fall under instalment credit. The more diverse your credit mix is, the better. So, if you only have a credit card, availing a home loan helps maintain the credit mix and thus your credit score.
On the flip side, home loans can also adversely affect your credit score. If you delay your EMI payments, the lender can charge you a penalty. They sometimes also update the credit bureau about the late payments, which can impact your score adversely. In addition, if you avail a higher value loan that is more than your income, it can influence your credit score and disturb the debt to income ratio.
How to Maintain Your Credit Score?
- Keep your debt income low: The debt to income ratio is the ratio of your total debt to your income. For a high credit score, you must manage your debt in a way that is lower than your income. It is best to keep this ratio below 30%.
- Pay EMIs timely: Initiate an automatic repayment for your home loan EMI so that you do not miss it.
- Opt for a tenure that helps you repay the loan comfortably.
- Avoid making multiple applications at the same time for a home loan.
Home loans and credit scores are dependent on each other. While a bad credit score can make lenders reject your home loan application, it goes the other way round too. If you repay the home loan on time, you can build credit and improve your credit report.