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Kolkata: Credit score is regarded as a financial lifeline these days. The reasons are clear. The biggest decided of whether you will get a loan sanctioned in your name depends mostly on the credit score of the applicant. A low credit score can make it difficult, or impossible, to get a loan on favourable terms (read, relatively lower interest rates). Even if one's credit score improves, the lenders will allow three years to pass before acting on the improved credit score, which was vary painful for an individual, who has taken pains to improve his/her credit score.
However, this situation is now changing. Reserve Bank of India has ruled that if your credit score improves, you will immediately become eligible for its benefits and don't have to wait for any period of time. The rules have become effective on December 1. One can request a reduction in the interest rates to the lender bank as soon as the credit score improves. Needless to say, it will drive down the EMI or shorten the loan term. This benefit will be applicable in floating rate loans.
It is worthy to note that a bank's interest rate on loans is made up of two components -- an external benchmark (such as the RBI repo rate, T-bill yield) and the bank's spread, the latter covering credit risk and costs. According to the new RBI rule, if the credit profile has improved, the lender could reduce the spread, thereby bringing down the interest rate you pay.
Earlier lending institutions would only review the spread once every three years. This would automatically delay any benefit that a borrower could get by improving her credit score. The new guidelines have abolished the lock-in period mandating an immediate relook. After you apply for a rate cut following improvement of your credit score, the lender will conduct a new credit assessment. If the improvement is found to warrant it, the spread will be reduced. The EMI could be reduced or the repayment tenure shortened. However, the customer has to apply for the benefit.
Most home loans have a repayment tenure of 20–25 years and range between Rs 25 lakh and Rs 75 lakh. A rate cut of 25 basis points can result in savings of thousands or lakhs of rupees over the entire tenure. If the customer is comfortable with the EMI, the repayment tenure can be shortened.
Maintaining credit discipline is the best way to improve credit score. Make timely EMI payments, go for low credit utilisation, applying for one credit card at a time (and not several at one go) and not closing old credit cards are a few steps that can help improve credit score.
