Why Maintaining A Good Credit Score Is Important Even After A Repo Rate Cut

When the Reserve Bank of India (RBI) lowers the repo rate, lenders also typically lower the rate of interest on loans. As such, home loan borrowers tend to assume that a reduction in repo rate by RBI will translate into a lower rate of interest on their home loans, and consequently, lower equated monthly instalments (EMIs) on the loan. 

However, what borrowers tend to often overlook is that the rate of interest bank levies on loans often depends on the borrower’s credit score. Many Indian banks now offer home loans with varying rates of interest depending on the borrower’s credit score. So, if the bank reduces the rate of interest because of a fall in the repo rate, borrowers with poor credit scores may not gain much.

How Credit Scores Affect Loan Rates

Union Bank of India charges interest on home loans based on the borrower’s credit score. A borrower with a score of 800 or more may be charged a rate of interest of 8-8.10 per cent, while a borrower with a score of 750 to 799 may be offered a loan at a rate of interest of 8.35-8.40 per cent. If the score falls to between 700 and 749, the rate is around 8.45 per cent. For a borrower in the range of 650 and 699, the rate can be 8.50 per cent, whereas a borrower with a score below 600 will be charged as high as 9.60 per cent. This implies that the borrowing cost could go up by as much as 1.5 per cent based on one’s credit score.

This is not exclusive to Union Bank of India. Other private and public sector banks and financial institutions have similar policies. State Bank of India, for instance, charges varying interest rates based on score ranges. While they charge a base rate of 9.15 per cent for those with good credit scores, for others, it can be as high as 9.60 per cent. HDFC Bank, Bank of Baroda and others also fix rates based on a borrower's credibility, though the exact ranges may vary.

Ways To Maintain And Enhance A Good Credit Score

Maintaining and enhancing a good credit score requires persistent effort, but it is achievable. The most crucial thing to do is pay your EMIs and credit card bills in time. Delayed payments are reported to the credit bureaus and can severely damage your score. Even a single delayed payment can cause a dip in your score.

Second, keep your credit utilisation ratio low. This is the proportion of your credit card limit you are utilising. Make sure it is less than 30 per cent of your overall credit limit. Say, your card limit is Rs 1 lakh. In that case, try not to spend more than Rs 30,000 in one billing cycle. High utilisation indicates reliance on credit and will influence your score.

Third, do not apply for several loans or credit cards within a short span. Every application triggers a “hard inquiry” on your credit report, and numerous such inquiries made within a short time period can lower your score. It might also inform lenders that you are overextended financially.

Another great idea is to review your credit report regularly—at least annually. This allows you to identify any error or fraudulent activity that could be dragging your score down. If you see any errors, you can bring a dispute and have them corrected.

Finally, try to keep old credit accounts open, particularly if you have had them in good standing. Having a longer credit history with regular payments makes your score stronger. Closing old accounts can reduce your credit history and lower your score, even if you have new cards. 

A Good Score Is Your Best Bargaining Chip

Short of it, even when the RBI reduces the repo rate, banks continue to scrutinise your credit score before deciding on the rate of interest on your home loan. A high score puts you in a favourable position to avail of lower rates on your loans. For prospective borrowers, keeping that figure above 750 is one of the most proven means of lowering the overall cost on loans.