Home loan EMI Too High? Blame Your Credit Score
For borrowers, the biggest benefit of banks switching to external benchmarking for new floating rate loans has been transparency in interest rate movements. However, borrowers —home loan-seekers in particular—now need to be more cautious about their credit profile. Banks are allowed to charge credit risk premium as part of the spread over the external benchmark to arrive at the effective interest rate. They are also permitted to re-rate customers and revise rates accordingly through the life of the loan in case of significant change in credit assessment.
While some banks like Bank of Baroda (BoB), Union Bank of India and Syndicate Bank will rely on credit scores, others like State Bank of India and Axis Bank have chosen to stick to internal risk assessment. For instance, BoB, which has linked its home loan interest rate grid to credit score bands, will revise rates if there is deterioration in a borrower’s CIBIL score. Similarly, Syndicate Bank will hike interest rates if there is a drop of over 50 bps in the borrower’s CIBIL score. “If a borrower has taken say a car loan, as well as a home loan from our bank and, is defaulting on the car loan while regularly paying housing loan EMIs, it will be viewed as deterioration in credit profile resulting in increase in home loan rate,” says Mrutyunjay Mahapatra, MD and CEO, Syndicate Bank.
Thanks to growing awareness around credit reports and scores over the years, the risk of defaults, delayed EMI and utility bill payments is widely known. Moreover, the credit score is not the only factor that banks use to determine creditworthiness and risk. Here are some lesser-known aspects that can push up interest rates and lower credit scores.
The credit profile is key to getting good rates
Change in credit assessment will attract higher rates during the life of the loan.
Over-investment in property
While real estate has not been a sought after investment avenue of late, it has traditionally been amongst the most favoured asset classes for Indians. However, if you own two or more houses and are applying for a loan to buy another house, you will be charged higher interest rates—25-50 bps more—even if your credit score is high. “This is because lending to individuals with two or more houses is considered commercial real estate lending as per RBI norms. Hence, such borrowings attract higher rates,” says Vipul Patel, Founder, Mortgageworld.in, a mortgage advisory firm. This would be applicable even if you are a joint owner of some properties.
Credit card as a borrowing tool
Credit cards are commonly seen as short-term credit instruments. However, the purpose for which you use your credit cards will affect your credit score. If you are using the credit card as a tool of convenience, that is, you are clearing your entire bill on the due date regularly, your credit score will be higher. However, if you are a credit card revolver, your score could be affected even if you are diligently paying the minimum amount due, says Ashish Singhal, MD, Experian Credit Information Company of India Pvt. Ltd.
High credit utilisation
You may have never breached your credit limit and have a perfect repayment track record on all loans. Yet, your credit score could dip if you come close to exhausting your credit limit regularly. “Over-utilisation or high utilisation of one’s credit card and overdraft limits can affect credit scores,” says Wilfred Sigler, Director of Sales and Marketing, CRIF India, a credit information company. You can find a way around it by opting for two or three cards instead of one. “Ensure that your utilisation never exceeds 40% of the total credit limit available across all cards at any point in time,” advises Chandani.
High appetite for credit
During the festive season, it is difficult to resist the temptation of discounts on expensive mobile phones or household appliances. No-cost EMIs only make it easier to give in to attractive offers. However, while such purchases can yield instant gratification, the tendency to overspend on the back of credit can drag down your credit scores. “Higher frequency of borrowings can affect your credit scores adversely,” says Singhal. Ditto if a credit information company receives too many enquiries for your credit score from multiple lenders. “If you apply for too many loans in a short time, you will be seen as credit hungry. Too many ‘hard’ enquiries will pull down your score,” says Navin Chandani, Chief Business Officer, Bankbazaar.com, a loan aggregation portal.
Dishonouring ECS mandates
From a borrower’s perspective, his systematic investment plan (SIP) in a mutual fund need not be his lender’s concern. After all, it is his investment, made voluntarily to achieve goals over the long-term. However, credit scores could be affected if ECS mandates for SIPs bounce. “Such instances could go against you. Banks will see you as an undisciplined individual. The same applies to non-payment of insurance premiums,” explains Patel. Finally, you can protect your credit scores by ensuring a clean slate when you close a loan or a credit card. “Make sure you obtain an acknowledgement letter, or a no dues certificate, from the lenders certifying that you have cleared all your debt. Else, any failure on part of the lender or discrepancy in the credit bureau’s systems can come to haunt you later for no fault of yours,” says Chandani.