How to establish Credit History from start?

New Delhi, Agencies | Updated : 18 January 2019, 12:44 PM
The most cost-efficient method to establish credit history is to get a credit card. (Representative Image)
The most cost-efficient method to establish credit history is to get a credit card. (Representative Image)

Credit score is a 3-digit number that reflects your past credit behaviour. A good credit score is an important asset. It is the key to get your credit applications approved. It is also increasingly being used by lending institutions to set loan rates. Building a credit score is tricky and without a credit history, it is even more difficult. You cannot build credit score without getting credit facilities such as loans and credit cards. Many people believe that getting a loan is the fastest and the best way to build credit history. However, this is not the case. In fact, availing loans to build credit history is not a good idea as then you will have to bear the interest cost along with the principle loan amount. Therefore, the most cost-efficient method to establish credit history is to get a credit card.

Build Credit History with Credit Cards

“Why credit cards?” must be the question popping in your head. Well, using your credit card is similar to taking loans. When you make a payment using your credit card, the concerned credit card company pays that amount on your behalf, which later on have to be repaid by the due date. Your credit card issuer reports your credit card transactions periodically to all credit bureaus. Credit bureaus include this information in your credit report and make use of it to calculate credit score.

Another reason to take credit cards to establish credit history is that credit cards do not incur interest amount provided the bills are paid on time. Credit card companies may levy charges such as joining fee but these too can be compensated with other credit card benefits such as cashbacks, discounts, reward point structures and so on.

You can apply for your first credit card with your current banker. You can also try applying for credit card at online loans and credit cards marketplaces. At such online platforms, you can find innumerable credit cards from different banks and NBFCs in one platform. You can compare different eligible credit card offers and choose the one that suits your requirements the best.

Failed to get a regular credit card? Try for a secured credit card

Credit cards are broadly classified into two types:

1. Unsecured credit cards – As the name suggests, an unsecured credit card does not require a collateral or security. People with no credit history or bad credit history mostly have a hard time in getting these types of credit cards. However, lenders may offer these types of credit cards to applicants with stable and substantial income or salary.

2. Secured credit card – This is another type of a credit card, which you can avail if you do not get regular or an unsecured credit card from the credit card issuer due to reasons such as insufficient or no income.

Getting a secured card is easier than availing an unsecured credit card as the former is given against a security or collateral, which usually is in the form of fixed deposit. The credit limit set for a secured credit card is usually 90% of the fixed deposit amount. However, the secured credit card users can withdraw cash of up to 100% of the amount deposited in the fixed deposit. Since your credit card is secured with the fixed deposit amount (FD), therefore, you cannot close your FD till you surrender your credit card. In case of default, the credit card issuer can liquidate your fixed deposit to recover the outstanding amount. This is also why secured credit cards are safe financial instruments for banks and therefore, they do not consider the usual eligibility criteria such as income, credit score and employment profile when assessing an application for secured credit card. Other than this and the fact that it is secured by fixed deposit amount, secured credit cards and unsecured credit cards work alike. Like unsecured credit cards, secured credit card transactions also are periodically reported to credit bureaus and resultantly reflect in your credit report and used to compute your credit score. Credit card benefits such as interest free period, cashback offers, reward points and so on are also available to secured credit cards users.

3 Basic tips to build credit score the right way

Getting a credit card, secured or unsecured, is a start. Now to build your credit history further, follow the tips given below:

Tip 1: Pay your credit card bills on time

Creditors lend money to those who unfailingly repay their credit card bills by the due date. Credit bureaus also are believed to give maximum value to repayment history when computing credit scores. Delay or default in repaying your credit card bill reflects on your credit report, which causes your credit score drop accordingly. Furthermore, your debt repayment history continue to reflect in your credit report for about three years or more, which implies that your credit report will hurt your credit score and loan eligibility for a significant period. For that reason, credit card owners must pay their credit card bills and loan instalments in time so as to build a positive credit history and good credit score.

Tip 2: Keep credit utilization ratio below 40%

Credit utilization ratio is a measure which shows how much of the credit has been used out of the total credit limit on your credit card(s). For instance, if the total credit limit on your credit cards is Rs.1,00,000/- and the sum of your credit card transactions is Rs.30,000/-, then your credit utilization ratio will be 30%. Creditors prefer lending money to applicants with credit utilization ratio between 30% and 40%. This is because utilizing more than 40% of the available credit gives an impression of a credit hungry behaviour, thus, making creditors wary. To avoid such a situation, keep your credit utilization ratio in check and do not let it go beyond 40%. If your expenses are more and your credit utilization ratio often exceeds 40%, request your credit card issuer to increase your card’s credit limit. You can also get another credit card to bring down your credit utilization ratio.

Tip 3: Avoid hard enquiries as much as possible

Hard enquiry is another important factor that can bring down your credit score. Hard enquiry is when financial institutions such as banks and NBFCs request your credit report from credit bureaus. Since these enquiries show in your credit report, it decreases your credit score by a few numbers. Therefore, instead of applying directly with lenders, apply for loan or credit card through online lending marketplace. At such platforms you can compare multiple credit options and also request credit information report from credit bureaus without impacting your credit score.

(This story has not been edited by News Nation staff and is auto-generated from a syndicated feed.)

First Published: Friday, January 18, 2019 12:23 PM
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