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Your credit score is one of the most important factors that influence your home loan eligibility. That is why understanding the factors affecting your credit score is essential, especially when you are planning to apply for a home loan. Here are five major factors that affect your credit score.
Payment History
When you are punctual about paying your bills, it reflects positively on your credit score. It is the most critical component of your credit score, which lenders consider while availing different types of loans such as home loans, etc. Following factors are considered under this component,
Payable Amount
The total amount you owe or the outstanding loans is the second most important thing. Here, the amount owed by you from various accounts like a credit card, personal loan, etc. is considered. Credit scoring evaluates all types of credit and how responsible you are while managing them. Furthermore, the comparison between the credit you consumed and your credit limit is also measured.
Size of your Credit History
The duration of credit usage is also taken into account while calculating your credit score. Various factors like duration of financial obligations, age of your credit accounts, etc. are considered under this component. If you are trying to improve your credit score for a home loan, you should pay all the payments on time to improve your credit history.
Having a long & good credit history is very helpful to build a good credit score. Finance experts advise keeping the credit accounts like credit cards open, even if you do not use them anymore. As time proceeds, the account ages and enhances your credit score.
Multiple loan applications
When you apply for a new loan or credit card, it gets reflected on your credit score. Lenders check your credit history, which contains the records of all your applications. Too many application requests made by you negatively affect your credit score and portrays you as a person who is in constant need for money. Lenders take this as a sign of financial instability.
Having more number of loans and credit accounts is not considered good for a credit score, and it also decreases your chances of getting loans like a home loan from lenders. When you apply for a home loan, the lenders inquire about your total existing liabilities. This helps them to evaluate your overall capacity to repay the loan. So, lenders consider that a person that is obliged to repay other loans will find it unmanageable to pay the home loan EMIs.
Types of credit on your name
Here, different types of existing credits like instalments on other loans, store accounts, etc. are considered. This is a small component that impacts your credit score. Accordingly, if you are planning to apply for a new loan like a housing loan in the near future, you should avoid taking any other loan before that.
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