Ready to take a home loan? Improve your CIBIL score first!

Do you know that your application can get rejected on account of a not so perfect CIBIL score?

Buying your own home is a perhaps a dream you have nurtured for the longest time and you want everything to go perfect as you make that application for a home loan that you have been saving up for. But did you know that even though you may have done everything right according to you and saved up enough for the down payment of your dream home, your application can get rejected on account of a not so perfect CIBIL score?

The Reserve Bank of India, the central banking authority of the nation has now made it mandatory for all lenders to check the CIBIL score of an individual as her/his credit assessment process. Therefore if your CIBIL score is anything less than 750 (out of 900) there is a good chance that your home loan dream may get squashed! To avoid such a situation, it is necessary for you to improve your CIBIL score before you apply for the home loan. Here's how to do it:

Check your CIBIL report well ahead of time

At least six months ahead of applying for your home loan, pull out your CIBIL report and scan it thoroughly. If you are falling short of a satisfactory CIBIL score, check where you are going wrong and go about eliminating those weak spots from your CIBIL report.

Rectify errors

Sometimes, you may have done all it takes to maintain a good CIBIL score, but it still goes downhill owing to errors and discrepancies. In case you find errors such as a loan account that has been closed on your part but is still reported as open, or a mistaken identity you need to go about setting the records straight. This you can do by raising a CIBIL dispute.

Depending on the nature of error, it may take a few days or up to a month to rectify the error. Once the error has been rectified wait for about a month to allow CIBIL to make the changes at its end. Once again, pull out your CIBIL report to ensure that the mistakes from your records have been eliminated and your CIBIL report is blemish free.

Clear large outstanding loans

If there are no errors on your CIBIL report and your CIBIL score is still low, it is perhaps on account of a large outstanding that is showing up as revolving debt on your CIBIL report. To get rid of this problem and bring up your CIBIL score, you need to settle this outstanding amount as soon as possible.

Consider liquidating some of your other assets in order to pay off this outstanding loan as it will bring up your score to a satisfactory level. Even if your outstanding loans are not too large, improve your repayment track record and make repayments in full on time as they have the largest bearing on your CIBIL score.

Avoid shopping for new credit

At least six months to a year ahead of applying for a home loan avoid applying for any new credit lines, especially unsecured credit. Every time you apply for any new credit, it is recorded as a "hard inquiry" on your CIBIL report and brings down your score each time. Too many hard inquiries not only brings down your CIBIL score, it also projects an image of you being "credit hungry" that may make your banker wary of giving you a home loan.

Keep credit utilisation low

Credit utilisation or the total amount of credit you are using as against the total amount made available to you, also has an impact on your CIBIL score. If your credit utilisation is too high, make sure it is brought down to the range of 30-40 per cent before you apply for a home loan. This too will have a positive impact on your CIBIL score.

Getting the home loan for your dream home may be a dream you can realise sooner than you think is possible, if you keep your CIBIL score high. Making some extra effort to improve your CIBIL score will go a long way to see that your home loan application is approved smoothly.

Photograph: GotCredit/Creative Commons

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.