Why Home Loan Closure Adversely Impact CIBIL Score

As i mentioned in my earlier posts that Home Loan is a secured loan and it impacts your CIBIL Score positively i.e. after availaing Home Loan, your CIBIL Score will increase because of its secured nature. Contrary to popular belief, closure of Home Loan negatively impact CIBIL Score. Let’s understand why

Recently i cleared my Home Loan and i was very happy about this fact but this happiness was short lived. As i mentioned in one of my article Home Loan Closure – 5 Important Points that it is very imp to check that your Home Loan account is closed by lender in CIBIL Score database after Home Loan is closed. When i checked my CIBIL score, it was a shocker because my CIBIL score reduced by 12 points after Home Loan Closure. I was expecting improvement in my CIBIL Score as i cleared huge debt of Home Loan.

When i studied in detail, i observed following reasons for drop in CIBIL Score post Home Loan Closure

1.  Question mark on Future Re-Payment Capability:

During Home Loan tenure, we pay regular EMI and it reiterate our re-payment capability every month but after Home Loan Closure CIBIL does not have any secured parameter to check re-payment capability. You must be wondering what about credit card payment. Credit card is un-secured loan/credit and has limited positive impact on CIBIL Score even in case of timely payments but has huge negative impact on CIBIL Score in case of even single default of small amount.

2. Reduced Credit Worthiness:

In laymen term credit worthiness of individual is magnitude of risk which a lender is ready to take on individual i.e. max credit he is willing to offer. Home loan increase credit worthiness many fold but after Home Loan Closure Credit Worthiness is back to square one thus lower the CIBIL Score.

3. Secured Loan in Credit Portfolio:

Any secured loan like Home Loan in credit portfolio improve CIBIL Score thus Home Loan Closure takes away crucial points from CIBIL Score. Personal Loan and Car Loan are unsecured loans and negatively impact CIBIL Score.

4. Lender’s Negative Outlook:

Though last point has nothing to do with CIBIL Score directly but as the Average duration of any Home Loan in India is 7-8 Years and if you are closing your Home Loan much before 8 years then there is a probability that you might face difficulty in availing 2nd Home Loan in future. Reason bank borrow money at a cost and any pre-closure/pre-payment is liability for bank. If money remain idle due to low credit take off then its a loss for bank. Therefore besides CIBIL Score, pre closure of Home Loan too early can impact future credit worthiness despite good CIBIL Score.

In my personal opinion, its better to be debt free as early as possible because of uncertain economic conditions, unstable job market and forced early retirement even if there is slight negative impact on CIBIL Score it’s fine.

Hope you liked this post.