If a credit institution needs to establish a person’s credit status and assign them a credit score, credit history is an essential source of information. Building credit from the ground up can be difficult because a credit history is required to generate a credit score. The irony for first-time borrowers is that no bank or financial institution would issue a loan or credit card without first checking their credit score.
Building a credit score from the ground up might be difficult. To build a CIBIL score, you must have a credit history. However, this proves to be a conundrum since without a good credit score, no bank or financial institution would accept your loan or credit card.
1. Apply for prepaid Credit Card
A Credit Card is a wonderful tool to enjoy financial freedom of buying now & paying later, without any additional cost. Each Credit Card comes with 40-50 days of free credit period along with multiple rewards and cash back offers. Besides all these benefits, a Credit Card is also a tool to build a good Credit Score.
However, at the same time, it is also true that you may not be eligible for a Credit Card without a credit history. In order to begin your financial journey, it is thus advisable to apply for your first Credit Card against a bank FD.
2. Purchase on EMI
In case you neither need a loan nor a Credit Card, you can consider making a purchase on EMI using your Debit Card. You can shop online or at an outlet for any of the consumer durable goods like Mobile, TV or Laptop on EMI. Most of these FMCG products including household electronics are available at discounts and EMI plans. You can open an EMI plan for 6 to 18 months. The record of successful repayment of this purchase will build a clean history of repayment and thus a good Credit Score.
3. Don’t apply for Multiple Cards at once
This is because every time you apply for a credit card, your credit score suffers a slight diminishing effect, but magnify this with the number of credit cards applied for and the dent on the credit score could prove to be fatal. Besides, applying for too many credit cards would make an impression of you being a person hungry for more and more credit.
4. Pay EMI on time
Try to pay your EMIs and instalment on time as your regularity in paying your dues are always reported by banks to credit-bureaus, who are involved with drawing up tidbits of information that pertains to your credit history that could be used to prepare your credit score. By being timely in your payments, not only are you having a good impression on the bank but also ensuring the preservation and consolidation of your credit score.
5. Use Credit Card Regularly
People don’t get credit score from credit bureaus either because they are new to credit or their credit history is negligible for bureaus to even consider. If you want to build a healthy credit score, make sure you use your credit card regularly. Since, it takes time to build a healthy credit score, regular use of credit card while ensuring their timely repayments will help you build a good credit history. It is advisable to use your credit card at least once in a month at shopping stores, restaurants, or other things to keep your credit card active. This tip is useful not only for those who have an established credit history but also for those who want to build one. Therefore, it is advisable Once in a month, use your credit
6. Monitor Credit Utilisation Ratio
Your credit card comes with a credit limit (the maximum amount that credit card lenders allow borrowers to spend). When you start using a credit card, credit bureaus consider the credit utilisation ratio to determine your credit score. Also known as balance-to-limit ratio, it is the proportion of the credit limit and the amount you have spent using a credit card.
Monitoring this ratio is important as it shows how well you manage the credit available to you. If you don’t want to give an impression of a credit-hungry person, try to limit your credit utilization ratio within 30%–40% of your total credit limit. Even though a CUR of 60-70% has almost no impact on your score, but maxing out your card frequently or having CUR 90-100% on a regular basis portray you as a credit hungry person and may impact your score negatively.
7. Adopt Good Financial Habits
In all, every time your repay a credit, it builds up your Credit Score and thus improves your likelihood for loan approval. Having a good score also protects you against unprecedented financial emergencies. You always have your credit limit as a backup for urgent cash needs.
- Repay regularly
- Low Credit utilisation
- Have a good mix of secured & unsecured loans
- Keep debt-to-income ratio low