It was a busy week gone by for Aditya as he had to make a couple of visits to his bank to get the wrong default corrected in his credit history. Even when his credit score was a reasonable figure now, he noticed a couple of more remarks in his credit report.
Here’s a screenshot of his credit report:
As usual, the fingers on his iPhone were already dialing Kuber
“My score is 724. But it also shows that the number of home loan is low and a number of unsecured tradelines reported in last 3 months are mid-range. How do I improve my score?” Aditya seemed confused.
Kuber tried convincing him, “724 is not a bad score. You can certainly get a home loan at competitive rates now. However, the credit score indeed considers the kind of borrowings you are resorting to.”
“But how does it make a difference, when I am repaying all the loans on time?” Aditya indeed had a valid point.
“A secured loan is one for which the lender has sufficient security/collateral against the funds lent to the borrower. Housing loans, Loan against Property (LAP), car loans etc. are examples of secured loans. Similarly, personal loans, credit card come under the category of unsecured loans. For a lender, an unsecured loan signifies a greater risk of lending to you. This is why the higher ratio of unsecured debt adversely impacts your credit score.”
“So, can I take it the other way round, taking a secured loan helps me get a better credit score?” Aditya was quick on grasping the subject.
“A Loan Against Property (LAP) is always considered a reliable loan because the value of the property/ security is sufficient to cover the amount of the loan outstanding and its interest. Banks lend only a set percentage of the property value, also commonly referred to as Loan-to-Value ratio (which ranges between 65-75 percent). The rest is invested by the borrower from his own funds. As such, this takes care of bank’s interest in the case of any adverse changes in the market value of security. Further, since the borrower’s own funds are also at stake, the repaying tendency is higher. This helps you improve your credit score.” Kuber imparted him some more financial wisdom.
“You were anyways asking for a home loan. Apply for it again tomorrow. It will serve both purposes, getting you a new house and also improving your credit score.” Kuber quipped and Aditya could just smile.