Want cheaper loans? Improve your credit score

Have you been extremely prudent when it comes to your finances and paid your bills regularly? Then, getting a loan sanctioned from your bank may be a breeze. But that’s not all. Rewarding your good financial behaviour, few lending institutions also offer you cheaper interest rates on certain loans, if you have a top-notch credit score.

Credit score is calculated to assess the credit-worthiness of an individual. Your credit history, in effect, carries information on how well you have managed your debt in the past and repaid money you have borrowed. This credit score is calculated by agencies such as CIBIL, Equifax, Experian and CRIF Highmark in India. Ranging from 300 to 900, the higher the score, the better are your chances of getting a loan and better deals.

Different scores, rates While other factors like monthly income that determines an individual’s propensity to pay is also important, credit score is a key deciding factor for banks while sanctioning a loan.

Until now, there has been no policy or clear criteria that link credit score with interest rates charged on loans. Few banks, however, are now looking to make loan pricing more transparent.

Bank of Baroda, for now, is the only one that offers home loans with rates linked to your credit score. If you have been settling your bills on time, and have a credit score of 760 and above, you are eligible to get home loans at the cheapest rate.

Ashok Aneja, GM Retail Banking, Bank of Baroda, says that a rating score above 760 is offered interest rate of 8.35 per cent, while a score between 725 and 759 would imply a higher 8.85 per cent interest on your home loan. A borrower with a score below 724 is charged 9.35 per cent interest.

For borrowers with no credit history, the bank offers 8.85 per cent.

If you are a prudent borrower with a healthy credit score, you can save a tidy sum on your monthly EMIs. For example, for loan amount of ₹40 lakh and tenure of 30 years, the EMI for an individual with credit score of 760 and above works out to about ₹30,330. For a borrower with credit score of 725-759, a similar home loan from Bank of Baroda would mean an EMI of about ₹31,750. Hence, a top-notch credit score could lead to annual savings of around ₹17,060 and about ₹5.1 lakh lower interest over the entire tenure of the loan.

Many other banks such as Punjab National Bank offer corporate loans with rates based on credit score. Loans to corporate borrowers rated highest (score above 80) are charged a rate that is 20 basis points higher than the respective benchmark lending rate (MCLR or marginal cost of funds-based lending rate). As the risk profile deteriorates, the mark-up over the MCLR moves up to 500 basis points.

Others to follow suit Naveen Kukreja, CEO & co-founder of Paisabazaar.com says that few non-banking financial companies (NBFCs) are likely to follow risk-based pricing in the near future.

This is expected to soon catch up in India as it is a win-win situation for both lenders and borrowers, says Navin Chandani, Chief Business Development Officer, Bank Bazaar.com. He adds that borrowers with better credit scores will be in a position to negotiate with lenders for better deals.

Factors to be considered So, as a borrower, you can pitch for lower rates if you have a good credit score. But what decides your credit score in the first place?

Paying in full and in time is a key factor influencing your credit score. One late payment can eat into your credit score.

Vice-President and Head of leading credit agency, CIBIL, Hrushikesh Mehta says that credit score is based on the track record of the individual, which shows the repayment history of credit bills. Repayment of bills on time and in full is considered to be credit positive and indicates the fund managing ability of the individual.

A good credit practice and managing debt responsibly is another factor that can earn you brownie points. It is important that you stay well within your credit limit. Using up a chunk of your credit limit may indicate that you are ‘credit hungry’.

Vice-President at CRIF Highmark, Parijat Garg, says that repayment history, utilisation, distribution of credit and length of credit are important. Utilisation in terms of credit card usage, at 30-40 per cent, is considered optimal.

Distribution of credit indicates the ratio between the secured and unsecured loans, which is also factored in the credit score. More of unsecured loans is considered to be credit negative. Length of credit — how long the individual has been using the credit — also influences credit score.

Don’t go overboard by applying for too many credit cards at a time. This can damage your credit score as well.

As a borrower, you have easy access to your credit score, with all credit agencies providing free credit reports.

Keep a tab on your credit score regularly and make the best use of it to get the best deals.

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