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Why is it hard to get a home loan if my CIBIL Score is bad? How do I improve it?

35 year old Suresh Rangarajan had at all going for him last year. He had just got a promotion and a substantial jump in his salary and thought it was time for him to make the big move of buying his own house. He had already set his eyes on a small apartment close to his parent’s place in Thane. But little did Suresh know there was a shock awaiting him, when reputed Bank ABC rejected his home application.

When Suresh asked his loan officer what was wrong with his application he was told that he was denied a loan because his CIBIL score was only 650 (out of 900). Top banks in India have become stringent in their credit appraisal processes and one of their most important norms is a CIBIL score of 750 and above. Suresh tried making another home application with Bank DWE, but this bank was offering a loan at a rate that was at least 3% higher than what Bank ABC had offered. Suresh then thought the better of it, and is now working on improving his CIBIL score. He plans to re-apply to Bank ABC for a home loan in 2015.

All commercial banks in India consider a score of 750 or above as the ideal score for one to qualify for a home loan and are not willing to lend to people who have a lower score than that. If you find yourself in a similar situation like Suresh, here is what you can do to improve your score:

  1. Scrutinize your CIBIL report

The reason why you have a poor CIBIL score is because your CIBIL credit report is poor. So the first thing you do is pull out your credit report and see what is wrong with it. If you do not understand it yourself, go to your loan officer and ask him to explain to you what your delinquencies are. The other thing to do is to check out if there are any discrepancies in your report. Sometimes there may be disparities in your report like a loan that you may have closed may not have been updated on CIBIL by your previous bank. If you find such a discrepancy, raise a dispute via the Dispute Resolution Process of CIBIL. Ideally, you should have done this before applying for a home loan.

  1. Make planned payments

There is no escaping from this one. If there are no discrepancies in your report and you have not been approved a loan because of unpaid debt you need to start paying off your debts. Choose your most recent and cheapest debt and start making repayments. If there are smaller debts to be repaid, choose them over that big one. Not only will it be easier for you, it will look better on your credit report too.

  1. On time payments

Now that you know the importance of timely repayments, start doing that religiously. The same goes for your credit cards too. Do not make the mistake of surrendering your credit cards if you find your credit score is not too flattering. Continue using them and try to pay your balances in full, if this seems difficult, keep utilization below 30% (do not keep more than 30% amount of your credit limit on a revolving cycle). Also make sure you make payments on credit card bills before the due date.

  1. Do not make fresh inquiries or applications for new debt

If you have just been refused a home loan because of a poor credit score, do not even think of getting a car loan or a personal loan instead to compensate for it! In fact do not even make an inquiry about the same as that will be recorded by CIBIL as well. Unless you have cleared out past dues, it’s best to lie low, cut down on all other expenditures and concentrate on improving your score.

While your CIBIL score is something that is not etched in stone, it does take time to improve it. It may take six months to a year, depending upon the number of accounts having an issue. Be patient and give yourself time to get back in shape financially.