A credit score is a three-digit numeric value ranging from 300 to 900 that assesses a borrower’s creditworthiness. It is calculated using algorithms that evaluate various aspects of an individual’s credit behaviour, including (but not limited to) repayment history, credit utilisation ratio, number of credit accounts, age of credit lines, and frequency of credit inquiries.
A good credit score not only facilitates access to credit but also serves as a comprehensive indicator of an individual’s financial behavior and reliability, effectively functioning as a financial résumé.
The role of credit monitoring
A good credit score significantly influences several parameters of a home loan application, including the rate of interest, loan-to-value (LTV), and tenor eligibility. Given that home loans are typically high-ticket and long tenor in nature, a strong credit score enables borrowers to access loans at more favourable terms, thereby reducing their EMI obligations.
Conversely, a weak can severely impair an individual’s ability to secure a home loan. It indicates elevated credit risk, prompting financial institutions to apply more stringent underwriting norms. These may include requirements for additional documentation, collateral details, income proofs, and mandates for co-applicants or guarantors. Such measures serve as mitigants to offset the perceived risk associated with a non-satisfactory repayment history, as indicated by a low credit score.
Many financial institutions (FIs) set credit score thresholds as minimum criteria for processing loan applications. This helps them filter out borrower profiles that do not align with their risk appetite or strategic objectives. For example, while a credit score above 750 is considered strong, institutions may set operational thresholds at 600 or 650 for processing home loan applications.
Additionally, credit scores are often used to determine pricing. Borrowers with higher scores may receive interest rate discounts, while those with lower scores may be charged a premium to compensate for increased risk.
FIs also conduct periodic credit bureau scrubs to refresh borrower credit scores. This ongoing monitoring enables them to assess portfolio quality and detect early signs of stress. In cases where a borrower’s credit score deteriorates, institutions may take corrective actions such as increasing the interest rate or restricting further credit exposure.
How to improve your credit score
Improving one’s credit score is crucial for accessing loans at competitive interest rates and on favorable terms. Individuals can take the following steps to enhance their credit profile:
- Maintain a low credit utilization ratio: A lower ratio indicates prudent credit management and positively impacts your score.
- Clear outstanding dues: If your credit report reflects a “settled” or “written off” status, aim to repay the full outstanding amount and request the lender to update the status to “closed” in the credit bureau records.
- Limit new credit inquiries: Each credit application results in a hard inquiry, which can reduce your score. Multiple applications in a brief period may be viewed as a sign of credit-hungry behaviour.
- Monitor your credit report regularly and maintain a balanced credit mix: A healthy blend of secured credit (such as home or auto loans) and unsecured credit (like personal loans or ) demonstrates responsible credit behavior and contributes to score improvement.
Maintaining a heatlhy score
With credit bureaus becoming more integrated into the financial ecosystem, it is imperative that borrowers are made aware of both their obligations and rights. Promoting a sound credit culture through enhanced consumer awareness and robust information systems can empower individuals to manage their credit behavior more effectively.
The rise of consumerism is driving behavioral shifts, with products such as Buy Now, Pay Later () encouraging borrowers to open multiple credit accounts. While convenient, such products can present challenges, ranging from difficulty in tracking spending to debt accumulation and missed payment deadlines. Recognizing and managing these behaviors is essential for maintaining financial discipline and improving creditworthiness.
What if you have a low score
A lower credit score does not necessarily preclude access to financing. Some lenders employ alternative credit evaluation methods or leverage risk mitigation tools such as mortgage guarantees to provide access to credit for such borrowers. However, these should be seen as enablers, not substitutes for sound credit behaviour.
Progressive financial instruments, such as mortgage guarantee (MG)- backed home loans, are increasingly being adopted by both borrowers and financial institutions. MG serves as a credit risk mitigation tool by providing a first loss default guarantee (FLDG), thereby enhancing the lender’s confidence in extending credit to riskier profiles. For borrowers, MG-backed home loans can increase loan eligibility, enabling access to higher loan amounts, longer tenures, and more manageable EMIs.
A credit score functions as a financial passport as it reflects an individual’s financial discipline, choices, and reliability. By understanding and improving their credit score, borrowers can make their home loan journey smoother, faster, and more cost-effective. Maintaining a strong score not only enhances loan eligibility but also provides long-term financial peace of mind.
Kanika Singh, chief risk officer, India Mortgage Guarantee Corp. (MGC)