On home loans ::Business Line

Credit score is a one-point reference

How helpful are credit reports and credit scores? I plan to take a loan soon. What precautions do I need to take?

— Vidya C.

A credit report which provides details about your credit score is a one-point reference of how prudently you handle any credit lent to you.

This depends on three factors: (a) The amount of credit you actually have access to. For example, if you have a credit card with a Rs 1 lakh limit, this is definitely better for your credit score compared with a lower limit of, say, Rs 25,000. (b) The time frame for which you have been accessing credit. For example, a borrower who has a home loan and is into his fifth year of repayment will have a better score compared with someone who is just two months into his loan tenure. (c) How prudently you manage your credit is key along with the above factors. Here it means paying on time, keeping a track of your net worth and balancing your budget, so that you don't take on too much credit, straining your ability to repay it.

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Based on these factors your credit score will be determined. This serves to act as a proof of your repayment track record, which will establish your credibility with any bank you opt to take a loan from. The better your repayment track record, the higher your credit score. If you have not taken any loan so far, then your repayment track record for your credit-card dues will be taken into account and before a bank lends to you they will equate that to your possible repayment pattern of a loan.

A good credit score will put you in a great position for a lower interest rate on your loan, unlike in the case of a borrower with a bad credit score, who may not be granted a loan in the first place and even if he is, the interest rates will be high due to the risk the bank takes in lending to him.

If you do not have a credit card or a loan, then you will not have a credit score. Banks will then gauge your eligibility based on income, years of employment, age, etc. Credit bureaus such as Credit Information Bureau of India Ltd are working on tying up other payments like telephone bills, insurance premium, etc. to decide creditworthiness.