A strong credit history can ease your access to credit, which, in turn, can help you realise your life goals.
When it comes to financial freedom, your credit history has a significant influence on it. A strong credit history can ease your access to credit, which, in turn, can help you realise your life goals. Building a credit history is something that is best started early. This way, you can reap its benefits later in life. Incidentally, we kicked off Credit Score Awareness Week on June 12 to spread awareness about the importance of credit scores.
If you are a young working adult aiming towards a financially free and secure future, building a strong credit score and history should be one of your top financial goals. Besides easing your access to loans and credit cards, a good credit score can unlock the door to a host of other benefits. Let’s take a look at some of these benefits, along with some tips on how you can build your credit score.
Access to credit made easy
A healthy credit history typically translates to a high credit score of 750 or above. A high credit score is indicative of better creditworthiness, something which lenders take into account when reviewing your loan application. If you don’t have a credit history or an unhealthy one, lenders are more likely to request you for a co-guarantor or co-borrower on your loan application. Not only that, a bad credit history means lenders may treat you as a high-risk borrower. This can lead to your loan request being subject to extra scrutiny, longer processing times, and higher interest rates.
Reduced interest on loans
The interest that lenders charge borrowers, is, to a large extent, determined by the borrower’s credit profile. A healthier credit history indicates low risk, while a poor credit history indicates that the borrower is a high-risk applicant. In the absence of a credit history, the lender has no benchmark to assess the level of risk that the borrower poses. To mitigate their risk, they are likely to charge a higher risk premium which means a higher rate on the loan. On the other hand, a strong credit history and high credit score could fetch you a lower rate on your loan.
Better deals and offers on credit cards and loans
A good credit history makes you more likely to receive better deals and offers on credit products like loans or credit cards. For example, if you have a high credit score and a healthy credit history, lenders may be more likely to offer you a pre-approved loan, a lifetime free, premium credit card, or waive the processing fee on your loan.
To meet financial contingency
At the start of their career, people are less likely to have a contingency fund to deal with unforeseen situations such as a job loss or a medical emergency. A healthy credit history can make it easier for you to get a loan to meet your needs during such a situation.
Effective ways you can build a strong credit history
If you have never taken a loan, but want to build a credit history, here are some ways you can do so.
Get a no-frills, basic credit card
Start by getting yourself a basic credit card with a low credit limit. This may be easier to acquire from the bank that maintains your salary account. After getting the card, use it cautiously and clear off your dues on time. Aim to keep your credit utilisation to 30% of the available limit. By clearing your card dues regularly and on time, you will be on your way to building a healthy credit history.
Get a secured credit card
A secured credit card is one which you can obtain by pledging collateral with the bank or issuing authority. Typically, you will be asked to submit a deposit for a certain amount and provide you with a credit card with a limit equal to the deposited amount.
Purchase a low-value product on a loan
Consumer durable loans can be taken to purchase a wide range of electrical appliances and electronic devices. These loans make your purchases affordable by breaking up the cost into multiple smaller instalments, which are easier to pay and help you build a credit history. For instance, if you purchase a mid-range phone in 12 instalments, you can expect your credit history and credit story to begin taking shape about 6 months into repaying your loan.
When applying for credit, you must be aware of your repayment capacity. Assess your requirements before borrowing, and repay your dues on time. Once you are in the process of building a credit history, maintain it by being financially disciplined in your repayments, and checking your credit score regularly.