Applying for a mortgage is a significant financial step, and having a solid credit score can make a big difference in the interest rates you receive and your overall borrowing capacity.
If you’re planning to buy a home, knowing how to improve credit score before applying is essential.
Table of Contents
Impact of Credit Score on Home Loan Interest Rates
Improving the credit score is crucial before applying for a home loan in India, as it directly influences the interest rates offered by lenders. A higher credit score enhances your eligibility, and secures more favorable loan terms, potentially saving you a substantial amount over the loan tenure
- Credit Score Above 800
Borrowers with a credit score above 800 are often offered the most competitive interest rates. For instance, ICICI Bank offers home loans starting at 9.00% per annum for individuals with such high scores.
- Credit Score Between 750-799
Individuals within this range can expect interest rates around 9.15% per annum. State Bank of India (SBI) offers this rate to customers with credit scores of 750 or higher.
- Credit Score Between 700-749
Borrowers in this bracket may face slightly higher interest rates. For example, SBI applies an interest rate of 9.35% per annum for credit scores between 700-749.
- Credit Score Between 650-699
Interest rates increase further for this group. SBI offers an interest rate of 9.45% per annum for individuals with credit scores in this range.
- Credit Score Between 550-649
Borrowers with scores in this lower range are subject to even higher rates. SBI charges an interest rate of 9.65% per annum for credit scores between 550-649.
A lower credit score not only results in higher interest rates but also significantly increases the total interest paid over the loan tenure.
So, on a ₹50 lakh home loan, a borrower with a low credit score might end up paying approximately ₹19 lakh more in interest compared to someone with a higher score.
15+ Ways to Improve Credit Score Before Applying for a Mortgage
Here are some effective ways to boost your credit score to set yourself up for success.
1. Review Your Credit Report for Errors
The first step in improving your credit score is to obtain your credit report from all three major credit bureaus.
Errors, such as incorrect late payments or accounts that don’t belong to you, can negatively impact your score. With rigorous reviews, you can identify any inaccuracies. If you find any, you should dispute them with the credit bureau to have them corrected.
Many people don’t realize that they can access their credit reports for free once a year from each bureau. This proactive approach allows you to keep an eye on your credit history and ensures you are aware of your current standing before applying for a mortgage.
In Kolkata, individuals can access their credit reports through local branches of major credit bureaus like RBI (Reserve Bank of India) or by visiting reputable websites like CIBIL. It’s advisable to reach out to financial advisory services in Kolkata that can assist in understanding and correcting discrepancies in your report.
Taking the time to correct these errors can provide a noticeable boost to your credit score and teach you valuable lessons about how to improve credit score moving forward.
2. Pay Bills on Time
Payment history is one of the most significant factors in determining your credit score.
Delayed payments can lead to late fees and increased interest rates, so being proactive with your bills can save you money in the long run and help you understand how to improve credit score effectively.
On the other hand, paying your bills on time shows lenders that you are responsible with your finances. Set reminders on your phone or calendar to ensure you never miss a payment. You could also automate your payments for recurring bills to help stay on track.
The payment cycles for utilities like electricity (Kolkata Electric Supply Corporation) and broadband (such as BSNL or ACT Fibernet) are prevalent. You can set up auto-pay features to help ensure timely payments. You can use local mobile banking apps that notify you of due dates.
Once you develop a habit of paying your bills promptly, you’ll notice an improvement in your credit score over time.
3. Lower Your Credit Utilization Ratio
Credit utilization is how much of your credit you are using compared to how much credit you have available.
It’s best to keep this percentage below 30%. For example, if you have a total credit limit of ₹1,00,000 on your credit cards, you should try not to owe more than ₹30,000. A lower percentage shows lenders that you handle credit wisely and aren’t relying too much on it.
If you’re using more than 30% of your credit, you should think about lowering it. You can do this by paying off some of your existing balances or asking your credit card companies to raise your credit limit.
Just remember, if they increase your limit, don’t start spending more. That would defeat the purpose of having a higher limit.
Also, don’t close credit cards you don’t use, because they help increase your total available credit and keep your utilization percentage lower. Keep an eye on your credit card spending and make sure to pay your bills on time.
That said, Kolkata has a rich tradition of personal financing and family loans. Individuals often rely on informal financing from family and friends. But be cautious when using such financial resources, as high dependence can affect your official credit utilization ratio.
4. Pay Off Credit Card Balances
Paying down your credit card balances should be a top priority if you’re looking to improve your credit score. High-interest credit cards can accumulate debt quickly, which makes it important to tackle these balances first.
Many banks in Kolkata, such as UCO Bank, Bank of India, and HDFC Bank, offer various credit cards with different features and rewards. Consider utilizing these offerings responsibly by keeping balances low and maximizing benefits without overspending.
Consider using the snowball or avalanche methods to manage your debt repayment. The snowball method focuses on paying off the smallest balances first for quick wins, while the avalanche method prioritizes high-interest debt.
Whichever strategy you choose, eliminating credit card debt can significantly enhance your credit score and provide insight into how to improve credit score in the future.
5. Avoid Closing Old Accounts
It might seem tempting to close old credit accounts that you no longer use, but doing so can actually hurt your credit score.
The length of your credit history is a factor in calculating your score. Keeping older accounts open helps improve this aspect. An established credit history shows lenders that you have experience managing credit responsibly over time.
Even if you don’t use an old credit card, it can still benefit your credit score by contributing to your overall credit limit and diversifying your credit mix.
Consider keeping these accounts open, even if you just use them occasionally for small purchases, to maintain a healthy credit profile and learn more about how to improve credit score.
6. Avoid New Credit Inquiries
Applying for new credit can temporarily decrease your credit score. Each time you apply, a hard inquiry is generated, and having multiple inquiries within a short period can signal to lenders that you may be experiencing financial distress. It’s wise to avoid applying for any new credit accounts in the months leading up to your mortgage application.
Focus on your existing credit accounts and improving your scores, rather than seeking additional credit.
If you’re in the process of getting a mortgage, it’s essential to maintain a stable financial profile, so avoid unnecessary applications that could hurt your score.
7. Negotiate with Creditors
This is an essential step in learning how to improve credit score. If you’re struggling to keep up with payments or have fallen behind, don’t hesitate to reach out to your creditors.
Many creditors are willing to negotiate. They may offer payment plans or even settlements to help you get back on track. Being proactive about resolving issues not only helps you manage debt but can improve your credit standing in the long run.
For debts that are already in collections, communicating with creditors can help you come to agreements that reflect favorably on your credit report. Having your debts marked as paid in full will positively impact your score and demonstrate to future lenders that you’re making an effort to rectify past financial struggles.
8. Become an Authorized User
One effective way to boost your credit score is to become an authorized user on a family member’s or friend’s credit card who has a good credit history.
When you’re added as an authorized user, the account’s positive payment history appears on your credit report, potentially raising your score. This is particularly beneficial if the other person has low balances and pays their bills on time.
However, it’s essential to communicate with the primary cardholder to ensure they manage the account well. If they occasionally miss payments or run high balances, it could negatively impact your score instead of helping it.
Choosing the right person to help you in your journey is a smart move when figuring out how to improve credit score.
9. Increase Your Credit Limit
Requesting a credit limit increase on existing credit cards can improve your credit utilization ratio, provided you don’t increase your spending.
A higher limit means you have more available credit, allowing for a lower percentage of utilization, even if your spending remains the same. This can positively impact your credit score.
When requesting a higher limit, ensure that you have a consistent history of on-time payments and responsible credit use. Many card issuers conduct a soft inquiry for limit increases, meaning this won’t negatively affect your score.
However, if they perform a hard inquiry, try to limit your requests to minimize any potential score dip as you learn how to improve credit score.
10. Diversify Your Credit Mix
A diverse mix of credit types can positively impact your credit score. This includes a combination of credit cards, installment loans, and even retail credit accounts.
Having various types of credit demonstrates to lenders that you can manage different accounts responsibly. However, it’s crucial to only take on necessary debt, don’t open accounts just for the sake of variety.
If you don’t have much diversity in your credit history, consider small loans or credit products that fit your financial situation to build a well-rounded credit profile. Just remember to make payments on time to maintain a positive credit standing as you continue exploring how to improve credit score.
Explore local options such as microfinance institutions that offer small loans. These can help diversify your credit mix when managed well. Research available products that fit your financial needs.
11. Pay More Than the Minimum
When it comes to credit card payments, striving to pay more than the minimum due can bolster your credit health.
Not only does this reduce your overall debt faster, but it also lowers your credit utilization rate, reflecting responsible credit habits to lenders. Additionally, paying more than the minimum can help you avoid costly interest charges.
Establishing this habit can serve dual purposes: improving your credit score and promoting better financial health overall. The sooner you can pay down your debt, the more advantageous it is for your financial future and mortgage application, showing you are serious about how to improve credit score.
12. Use Credit Monitoring Tools
Credit monitoring tools can be invaluable for tracking your credit score and receiving alerts about any changes or suspicious activity. Many services are available (some for free) to help you stay informed about your credit status.
With regular monitoring, you can spot issues early and take action to address them before they affect your mortgage application.
In addition, these tools often provide insights and tips on improving your credit score based on your credit profile. With these services, you can stay proactive about maintaining a healthy credit standing and strive to achieve an optimal score as you learn more about how to improve credit score.
13. Resolve Collection Accounts
If you have any debts currently in collections, taking steps to resolve them is essential for improving your credit score.
Contact your creditor to negotiate a settlement or payment plan. While collection accounts may not disappear right away, marking them as “paid” shows future lenders that you are taking responsibility for past debts.
Having resolved debts can also positively influence your credit history.
Remember, accumulating resolution agreements and keeping a clean slate will help in your journey toward a better credit score and increasing your knowledge of how to improve credit score.
14. Keep Balances Low on Revolving Credit
To improve your credit utilization rate, it’s essential to keep low balances on revolving credit accounts, such as credit cards.
Having high balances can negatively impact your score, so aim to keep these amounts minimized. This strategy not only boosts your credit score but also improves your financial health by reducing the amount of debt you’re carrying.
Consider creating a budget to help manage your expenditures on credit cards. Regular payments throughout the month, rather than waiting until the due date, can also assist in keeping your balances low, further supporting your credit score improvement journey and your understanding of how to improve credit score.
15. Avoid Co-Signing Loans
Co-signing a loan can be a generous gesture, but it can also present risks for your credit score. If the other party defaults on the loan, your credit will be impacted.
Before applying for a mortgage, it’s wise to avoid co-signing any loans, as these obligations can lead to increased debt on your credit report.
You must focus on your financial future when navigating credit decisions. Focus on maintaining your own creditworthiness before committing as a co-signer, ensuring that your credit remains in a healthy state when you start your mortgage application.
This awareness is part of understanding how to improve credit score effectively.
16. Monitor Your Credit Regularly
Regularly monitoring your credit allows you to track your progress in improving your score.
This proactive approach helps you catch any issues early, enabling you to resolve them before they affect your mortgage application. Being aware of your credit status can also motivate you to stay consistent in your credit improvement efforts.
Set a schedule to check your credit report and score monthly or quarterly, depending on your comfort level.
17. Save for a Larger Down Payment
While a larger down payment isn’t a direct method for increasing your credit score, it can significantly influence your mortgage approval process.
Lenders view a larger down payment as a sign of financial stability, reducing their risk when lending you money. This could offset any concerns regarding a lower credit score.
Plus, putting down more money upfront can lower your monthly mortgage payments and potentially eliminate the need for private mortgage insurance (PMI).
As you work on improving your credit score, also prioritize saving for that larger down payment to enhance your credibility in the eyes of lenders, ultimately improving your understanding of how to improve credit score for future financial decisions.
18. Stay Patient and Consistent
Analyzing the Kolkata real estate market shows that it’s growing steadily. Advise potential homeowners to be patient in their credit-building journey, as building a stable financial foundation can pay off in the long run.
Collaborate With the Experts!
Improving your credit score takes time, and it’s essential to be patient and consistent in your efforts. Avoid making drastic financial decisions, as these can negatively impact your score. Establish steady habits from now until your mortgage application, ensuring you stay committed to working on your credit health.
Most importantly, consult with the industry-best real estate experts like Expro Realtors, and get direct insights and roadmap to achieve your investment and financial goals, NOW!
