In the run up to the festive season, banks and home finance companies tend to slash home loan interest rates marginally and publicise their lowest rates of interest. Not many are aware that the lowest rates are offered only to the borrowers with a high CIBIL score. Let us decode what it means
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In the wake of the festive season, HDFC is offering a discounted rate of interest at 6.7 percent per annum on home loans. But there is a catch. It is only meant for the borrowers whose CIBIL score is above 800. For those with a relatively lower credit score, the interest rate will be charged in the range of 6.8 percent to 7.3 percent per annum for loans under ₹30 lakh.
The loan seekers who have a high CIBIL score are usually offered the best loan deals. If you have a high creditworthiness, housing finance companies and banks tend to offer loans at the cheapest interest rate.
Harshad Chetanwala, Co-Founder, MyWealthGrowth.com says, “Good credit score is not just helpful to get new loans at lower interest rate, but also help those with existing loans to approach their banks to review the interest rate as well."
Although the difference in rate of interest might appear small, the accumulated interest over a period of time can grow to become a sizable sum.
Let us understand this with the help of an example.
Let us assume you want to borrow a home loan for less than ₹30 lakh for a tenure of 20 years. The difference in the rate of interest can be 0.5 percent per annum (7.3 percent - 6.7 percent) on account of your higher CIBIL score.
In case the principal amount is ₹20 lakh, then the interest of 6.7 percent would lead to an outgo of interest amounting to ₹16,35,491.
On the other hand, for the same loan amount, interest charged at a higher rate at 7.3 percent would accumulate to ₹18,08,360. This means an additional total interest outgo of ₹1,72,869 solely for your relatively less credit score.
Similarly, the same loan amount of ₹20 lakh and the interest difference of a mere 30 basis points (7% - 6.7%) would lead to an interest amounting to ₹17,21,435.
This means an extra interest of ₹85,944. This amount looks modest but when someone charges you this amount for no reason other than the fact that you took longer than usual to pay your credit card bills, then this is certainly an avoidable and needless expense.
What is a CIBIL score?
CIBIL is a credit information company that measures the creditworthiness of borrowers in India., It assesses the customers’ credit worthiness by a measure called CIBIL score — a three-digit number between 300 to 900 — to evaluate a customer’s ability to repay loans.
The score of 800 plus is considered good whereas those who have a score in the range of 600-700 find it difficult to get their home loan approved.
Your credit card spend affects CIBIL score
When you keep your overall credit card expenditure below 30 percent of its overall limit, it is considered good for your CIBIL score. When you borrow more than this, it will adversely impact your credit rating.
Remember that when you make a purchase through credit card, you usually have a 45-day period to pay for that purchase. On the due date of payment, you can either decide to pay the minimum amount or clear the total due for that month. However, when you pay the minimum due, you carry forward your dues for that month to the subsequent month. This way, you hamper your CIBIL score. And as we saw, a high score can help you save a lot of money in the form of unpaid interest on future loans.
So, we can conclude that paying your credit card bills on time, and clearing your bills instead of just paying the minimum due will help you achieve a good CIBIL score, and thus a lower rate of interest on your home loans.
Headline: How to maintain a high CIBIL score
■ Limit your overall credit card expenditure below 30 percent of its limit.
■ When you borrow more than 30 percent, it will jeopardise your credit rating.
■ On the due date of payment, clear the entire due for that month instead of the minimum due.
■ When paying the minimum due (usually 5 percent of the total due), you carry forward your dues for that month to the subsequent month. This way, you hamper your CIBIL score.
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