I had once advised an old friend to find out his credit score before applying for a home loan. That friend scowled when he was informed that his credit score was zero. Now, the credit score is a value between 300 and 900 that the Credit Information Bureau (India) Limited (CIBIL) determines based on your past transactions with financial institutions.
CIBIL is a credit rating agency. Other bureaus such as CRIF High Mark, Equifax and Experian also serve to assess the creditworthiness of potential borrowers.
Importance of credit score
A higher credit score implies increased chances of getting a loan or money on credit at affordable interest rates. For those seeking loans or credit cards for the first time, the credit score ranges between zero and five.
If your credit score is zero or in the negative, it means that there is no immediate credit track record available for the borrower during the past six months. A negative credit history can also be a sign of bankruptcy on your credit report
. Lenders are wary of borrowers with low
credit scores, considering the high risk involved.
The risk of loan defaults is always there, which is why lenders are intent on evaluating the behaviour of their potential borrowers before accepting their loan applications. The credit score gives an inkling based on an individual’s credit history, thus helping banks and finance companies determine the likelihood of their borrowers defaulting on loan payments. Banks and finance companies are more than willing to lend money to people with credit scores between 750 and 900.
Seeking a home loan with zero credit history
What comes first, the egg or the hen? This proverb is apt in describing the dilemma of borrowers who must either build a credit history to seek loans or borrow money to build up a good credit history. It is impossible to build a credit history without seeking credit, while banks do not lend money unless they are satisfied with the borrower’s credit history!
The credit score is the first factor that lenders consider before deciding on their borrowers’ credibility. However, it does not mean that borrowers with no credit history are not eligible to apply for loans. There are factors beyond the credit history that help lenders gauge the ability of the borrowers to repay the loan taken.
Borrowers can submit the necessary documents to the lender that can satisfy the latter about the former’s ability to repay the loans on time.
Also read: How CIBIL and Experian score first-time loan applicants
Let us not attribute the rejection of our loan applications to poor credit history alone. After all, banks have been lending money to their customers and other borrowers way before the concept of credit score was put forth in 2005. The tried and tested principles to judge the eligibility of borrowers seeking home loans still count when put into effect. Some of them include:
Educational qualifications and job profile
Banks are more than willing to extend their loan services to prospective borrowers who are well-educated or exhibit a healthy job profile. Borrowers with a stable income source are more likely to catch lenders’ attention as the regularity of income enhances the likelihood of loan repayment.
Those employed in high-ranking positions with the government are deemed more suitable for home loans despite no record of having taken loans in the past.
How you handle your money matters to the bank too. This is why lenders ask for bank statements to check for regular savings and investments. Banks and finance houses also examine your financial transactions to check your attitude towards systematic investment plans or regular premium payment towards life insurance policies.
Regular expenses such as rent or frequency of shopping using debit cards are also checked before deciding the eligible loan amount.
You can seek a joint home loan
with your wife or sibling or parent – one with a good credit score. Alternatively, you may ask your friend or loved ones with a good credit score to sign as a guarantor for the loan you
seek. There are other parameters, too, that banks and finance houses use in the absence of a credit history to decide before granting loans.
Different banks and non-banking finance companies have different yardsticks to determine their borrowers’ credibility and evaluate their ability to repay the loan. With a zero credit score, you will not get loans at the best interest rates reserved for borrowers with a credit score above 750.
However, seeking loans will not seem like a distant possibility, thanks to other factors that lenders may consider.