Get your credit score before applying for loans
A good credit score can fetch you discounts on the interest rate for loans. A recent RBI recommendation may grant you the information for free soon.
A Reserve Bank of India (RBI) Committee headed by Aditya Puri has recommended a free credit report to each customer to spread awareness. Until this recommendation takes the form of a rule, you can still get your credit report and credit score from bureaus by paying a fee before you apply for loans.
The rewards would be in terms of discounted rates for good borrowers who always pay on time. Though banks have a rack rate applicable on loans, irrespective of the credit history of the individual, one can negotiate on rates based on the credit score. A score higher than 760-765 calls for rate negotiation.
Rajiv Raj, co-founder and director at CreditVidya, a financial literacy and credit counselling firm, says, “If you have a credit score of 765 or more on the scale of 300-900 for Credit Information Bureau India Ltd. then you have better bargaining power.” He says banks don’t lend to people whose credit score is below 750.
According to CIBIL almost 80% of home loans are sanctioned to borrowers with a score of 800 or above.
Differential pricing that is now being seriously discussed by the RBI is a way to reward good borrowers. “With respect to defaults, the percentage can be pegged at 1.5-2%, while 99% are paying on time. Identifying good borrowers and differentiating the pricing is the way forward, as spelled out in the RBI Committee’s recommendations recently,” says Satish Mehta, co-founder, Athena Credit Counselling.
However, one must check in the report whether there is a derogatory remark against your name such as loan write-off or a settlement of credit card dues. These would send the wrong signals to the bank or financier and may reduce your negotiating power, says Raj.
“There have been errors in the credit reports rarely – especially when there are two people with the same name,” Mehta adds.
One can even correct the mistakes in case there are any and thus reduce the chances of a loan application being rejected.
“In the US, one report in a year is free for customers. In India, you get a credit score for Rs470. Even banks that are supposed to give you your credit report, if your loan is rejected and you ask for the report, charge anywhere between Rs100-150 for a report. But according to the CICRA Act, bureaus can’t charge beyond Rs150 for a credit report,” says Mehta.
This situation is slated to change in the coming years. However, until then by spending this amount, you can reduce your chances of rejection and gain a bargain on the loan interest rates. “You can negotiate up to 25bps or a 0.25% discount on rates depending on the size of your loan,” adds Raj