Building a strong credit history is important for your financial life, as it impacts how easily and affordably you can avail credit. Credit score, derived on the basis of your credit profile, is the first thing that lenders check to determine your eligibility for a loan or a credit card. A strong credit history might help you qualify for loans at a lower interest rate or avail the best credit card offers from various providers.
If you are looking to start your credit journey, here are a few tips that will help you build a good credit profile:
Apply for a Credit Card
One of the most common ways to begin your credit journey is with a credit card. Not all card issuers offer credit cards to new-to-credit individuals. However, individuals with an established relationship with the bank, such as through a fixed deposit or salary account, have better odds of approval when applying for a credit card. To build your credit journey, you can apply for two types of credit cards, i.e., secured and unsecured.
If you have a reliable income source, you can apply for an unsecured credit card from the bank with which you have a savings or salary account. However, not all issuers would offer unsecured cards to those who are new to credit, in which case you can consider getting a secured credit card. Secured cards are offered against collateral, such as a fixed deposit, which acts as security in case you default on credit card bill payments. The credit limit offered on secured credit cards depends on the amount of the fixed deposit, and can go up to 100% of the fixed deposit amount.
You can explore entry-level credit cards on financial marketplaces like Paisabazaar.com, where you can compare and select the best card as per your needs and spending preferences. Once you have a secured card, use it responsibly by making regular purchases and paying your balance in full and on time each month to build a strong credit history. Avoid maxing out on your credit card frequently, as a higher Credit Utilization Ratio (CUR) can lower your credit score.
Consider Opting for a Loan
While personal loans can also help you start your credit journey, it is not advised to get a loan just for the sake of building credit. However, if you require funds immediately, you can opt for a small personal loan that you can comfortably repay as per your financial capabilities. New-to-credit individuals might face some challenges when applying for traditional unsecured loans. But there are alternative options available. You can opt for consumer durable loans or short-term personal loans, offered at a slightly higher interest rate.
Short-term loans typically range from a few months to a couple of years and come with a fixed term. By responsibly managing a short-term loan and consistently making timely payments, individuals can start their credit journey and build a strong credit history over a period of time.
Another way to start your credit journey is by considering a consumer durable loan. Individuals can take out these loans when purchasing high-value items, such as electronics, furniture, or appliances. By financing such big-ticket purchases and making regular payments, new-to-credit individuals can gradually build a strong credit history.
Restrict Frequent Credit Applications
Applying for multiple loans or credit cards within a short period of time might negatively impact your credit score. Every credit card application raises a hard enquiry on your credit report, which can temporarily lower your credit score, resulting in a bad credit history. Applying for too many credit products at a time shows that you are credit-hungry and have difficulty managing credit responsibilities.
Therefore, you should start your credit journey with one credit card initially. Use your card responsibly to build a strong credit history and get eligible for other credit products with better benefits. Build credit steadily by responsibly managing your credit usage and making on-time payments.
Ensure Timely Payments
One of the major factors in building a strong credit history is timely payments. The payment history has the highest weightage among other factors that are considered while calculating your credit score. That’s why it is important to make on-time payments and pay your balance in full each month. Frequently missing payments or making late payments can significantly impact your credit score, resulting in a poor credit history. Hence, ensuring full and timely payments is necessary for a healthy credit journey.
So, these are some of the things that can help you start your credit journey. Once your credit journey begins, checking your credit report regularly to see the progress is important to maintain a healthy credit profile. Regularly checking your credit report ensures accuracy by identifying and rectifying any potential errors. You can download a free report annually from any of the credit bureaus. Keep in mind that responsible credit usage can improve your credit score and make you eligible for credit products with better benefits.