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How to Build a Healthy Credit History?

Given the rising cost of living, an individual is bound to take a loan or credit card in order to finance a home, education or car. When you intend to borrow money from a bank or credit institution, the bank will usually check your credit track record to figure your credit rating. Financial institutions generally look for your CIBIL credit score and Credit Information Report (CIR) to determine your overall credit rating. Based on a good CIBIL score and credit profile, the lender will decide to disburse the loan on your name.

Thus, it is important for you to first understand the importance of timely payment of dues as a prerequisite to positively building one’s credit profile. You can start by drawing up a budget to make sure you can afford the repayments on time. Next, use your existing credit wisely and budget to make sure you don't spend too much. You should also check your bank statements very carefully each month to make sure you know where you are spending your money. Go digital, there are plenty on money manager apps available free for download. These apps can help you track all your expenses online via smartphone.

Building and maintaining a positive credit history is not much of a difficult task. We have specifically created a list of simple activities and habits which will enable you to do the same and become a responsible creditworthy individual.

Ways to Build a Good Credit History

  • Know what is a credit score - A credit score shows the credit worthiness of an individual. It also shows the kind of financial discipline a person has. It is created by credit bureaus based on the kind of loans, credit and payments done by an individual.
  • Start making all your payments on time - Now that you already have a credit score, you also might have a credit card or loan account running. From now on, ensure that you make all your payments on time, and do not allow even a single day of late payment. Your score can be negatively affected by a missed or delayed EMI payment on any of these credit accounts.
  • Pay off your credit card debt - If you have accumulated any credit card bills that are still unpaid, it is highly recommended that you pay these bills off immediately. Also, you need to make the payment in full. Banks often give you the option of making a minimum partial payment or a full payment on a particular due date. If you choose to make a minimum partial payment, the remaining amount is considered as overdue.
  • Check your credit report regularly - You should check your credit report regularly for any errors or incomplete financial information. The errors in your credit report can be the result of mistakes made by others. If there are any errors, then you should get in touch with your bank and raise the concern to get it sorted out. This will not only have a positive impact on your report but it will also make you look like a responsible individual in the eyes of CIBIL.
  • Take a loan - If you are someone with a low credit score, it is advisable that you take a small loan to purchase a gadget or smartphone via EMI. A small loan can be easily availed from the bank. This will help you increase your credit score provided you make all your payments on time.
  • Avoid applying for multiple credit cards at once - Every time you apply for a credit card, it impacts your credit score, especially if your credit card application gets rejected. Each rejection leads to a negative marking on your credit score. Instead of applying for a new credit card at multiple banks, use the one you have to demonstrate that you can handle credit efficiently. Always keep the usage low and pay the bill in full and on time.
  • Credit utilization - Also known as a balance-to-limit ratio, it is the proportion of the credit limit and the amount you have spent using your credit card. Every credit card comes with a credit limit, and credit bureaus consider the balance-to-limit ratio to determine your credit score. You should try to limit your credit utilization ratio within 30%–40% of your total credit limit.
  • Secured credit - A secured credit card is a type of credit card issued against your fixed deposits (FD) and their credit limit is usually capped at 90% of the FD amount. Since it is issued against an FD, you cannot close these FDs until you surrender your credit card. If you default on repaying the credit card bills, the issuing bank can liquidate your FDs to recover the dues. A secured credit card is a good way to generate your CIBIL score for the first time. Other credit card benefits like interest free credit period, fuel surcharge waiver, cash back offers, reward points, dining discounts, free movie tickets, EMI conversion, etc. are also available in secured credit cards.
  • Avoid direct loan and credit card enquiries from the bank - Credit enquiries initiated by banks and credit lenders on receiving your credit application are referred to as ‘hard enquiries’. Each hard enquiry is included in your credit report and your credit score is reduced by a few points. Instead, you can check the score yourself by visiting the official website of CIBIL.

New to Credit? Here's What You Can Do

If you have never applied for a loan or credit card, you will not have a credit rating. If such a situation arises, banks might outright reject your loan application since there is no credit history and your credit profile is non-existent. A non-existent credit profile also implies that your CIBIL score and Credit Information Report has not been generated. In order to improve and build your credit profile from scratch, you can apply for a secured credit card from any bank. A secured credit card is a type of a credit card which is issued only if you have made a significant investment in the respective bank, like a Fixed Deposit or a Savings Account. For credit beginners like you who are not eligible for a credit card at the start of your career, an unsecured credit card is the fastest way of building a healthy credit history, provided you pay all your bills on time and avoid any defaults. 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.

FAQs on How to Build a Healthy Credit History?

Does checking your credit score often brings it down?

Yes, credit inquiries do affect your credit score. To begin with, there are 2 kinds of credit inquiries - soft inquiries and hard inquiries. Hard inquiries are those when a lender inquires about your credit score to the credit bureau. This happens when you apply for a loan or credit card with a lender. Soft inquiries are those when an individual himself checks his credit score. The Reserve Bank of India has mandated that an individual should have access to his/her credit score at least once a year, free of cost. Soft inquiries do no harm to your credit scores. However, frequent applications and applications that keep getting rejected repeatedly are the ones that are bad for your score.

What is the range of credit scores in India?

Your credit score is a three-digit number between 300-900. It is ideal to have a score of 750 or above to qualify for loans or credit cards. If your score is less than 750, it is advisable to increase your score before applying for a credit card/loan.

Should I check my credit score before applying for a loan?

If you are specifically planning to apply for a loan, then check your score at least one year in advance so that you have enough time to improve your score. Having a good credit score maximizes your chances of loan approval.

How much time does it take to repair a credit score?

There are several ways in which you can improve your credit score. Depending on how good or bad your score is, it can take between 4-12 months or more to improve your score in order to become eligible for credit.

How to check credit score for free?

You can check your credit score for free by filling out the annual free credit report forms of credit bureaus like CIBIL, EQUIFAX, and Experian.

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