Your credit score is important for availing loans and credit cards. However, once such loans or credit cards are issued, how you handle the credit product impacts your credit score. In a similar manner, your credit score starts getting impacted once you take a home loan. Read the article to know how the home loan can impact your credit score in different stages.
Impact of Home Loan on your Credit Score
Let us understand how a home loan impacts your credit score under various circumstances.
1. Taking a Home Loan
- Taking a home loan can reduce your spending capacity at least for the short term. It also increases your EMI to NMI ratio.
- This may lead to a credit bureau reducing your credit score for some time.
- Some experts also suggest that it is done to warn lenders from approving new credit applications, as you now have relatively less money in hand for spending, and any new credit can increase financial strain on you, which can eventually lead to default.
2. Home Loan Rejection
- Your home loan may get rejected due to various reasons – property-related issues, lack of RERA certification, existing default/settlement in credit report, existing high EMI/NMI ratio, etc.
- In case the loan application gets rejected, there is a high chance that the bureau may reduce your credit score.
- Under such circumstances, it is best not to apply for a new home loan immediately and wait for your credit profile to improve through responsible credit behaviour.
Suggested Read: How to Improve Credit Score
3. Home Loan Improves your Credit Mix
- A home loan is a secured credit product as opposed to a personal loan, where you don’t have to provide collateral.
- A good credit mix contains various credit products, including secured and unsecured credit.
- A good credit mix signifies that you have handled various credit products smartly without default. This increases a lender’s trust in your credit behaviour, which in turn, translates into an improved credit score.
- A credit mix is not a necessity, but it is considered a good-to-have feature for a borrower and thus, impacts your credit score mildly.
- You should also note that no lender would reject your credit application just because you have not handled multiple credit products in the past.
4. Timely Payment of EMIs
- Paying all EMIs on time has a good impact on your credit score.
- Home loans are taken for a long term, and you have a very good chance of building and maintaining a strong credit score over time.
- Every payment information remains in your credit report for thirty-six months, and zero DPDs improve your credit score significantly.
- Missing the EMI payments due date frequently impacts your credit score negatively and has the potential to lower your credit score.
- Regular DPD values will damage your credit score now and make it difficult to avail credit in future.
Also Read: Days Past Due (DPD) in CIBIL Report
5. Prepayment of Home Loan
- Every prepayment made against your home loan reduces your credit burden and increases your lender’s trust.
- This usually has a positive impact on your credit score.
- Yearly prepayments apart from regular EMIs indicate that you have been handling your finances very well and there are very less chances of default.
- It increases your creditworthiness and helps in improving your credit score.
6. Foreclosure of Home Loan
- Foreclosing a home loan implies that you have not only managed to pay all EMIs on time but have also intently paid off your loan.
- Your DTI ratio (Debt to Income) lowers, leaving a surplus amount in hand, and if you need credit in future, you would be able to repay it without much difficulty.
- It can help increase your credit score and maintain it.
- Lenders can trust you over your behaviour in future as well and would not hesitate to approve your high-ticket loan request.
- However, the balance of your credit mix may be affected, leading to a minor impact on your credit score.
7. Home Loan Closure
- Paying off all dues on time and closing your home loan has a significant impact on your credit score.
- It shows that you have handled your credit smartly in the past, and lenders can trust you over high-ticket loans as well.
- Home loan closure increases your creditworthiness and may help improve your score substantially.
8. Home Loan Settlement/Default
- A default or settlement is not taken positively by lenders and credit bureaus.
- A default is when you don’t pay the remaining dues at all and cause heavy losses to the lender.
- A settlement is when you cannot pay the total dues and accept the lender’s offer to settle the default account at a lower amount.
- It shows that you did not abide by the loan terms, and lenders may not trust you for credit in future as well.
- Default or settlement damages your score to such an extent that you may not get any credit approved in future for at least the next three to seven years.
| Building a credit score is a long-term process, and a home loan can be a very beneficial tool in this case. However, if you don’t follow a disciplined credit behaviour, your home loan would negatively impact your credit score, making it difficult to get other credit applications approved in future. |
If you plan to take a home loan in the near future, check your credit score here and then apply for the most suitable loan offer. To build your credit score and become eligible for the best loan offers, subscribe to Credit+ and start rebuilding your credit history now.
