In India creditworthiness of an individual or business is assessed by referring to the CIBIL credit score and CIBIL credit report. But, if you are a first-time earner, you will not have a history of financial transactions to base your credit score on. A substantial and valid credit history is the basis for banks to evaluate whether a person is worthy of granting a credit line. Not having a credit history can be a tough proposition. It becomes difficult to get a loan or even a credit card because banks and financial institutions have no idea about whether you will be able to pay back any debt that you take. Lending to a person who lacks a credit history is a highly risky affair from a lender’s perspective. From the borrower’s perspective, it becomes even more difficult to build a credit history since very few lenders are willing to lend to such a person.
Just because you do not have a credit history does not mean you cannot build one from scratch. In fact, to build a great credit history is easier starting with a clean slate, once you know how to kick-start the process the responsible way. Here’s how to create a credit history.
How to Create a Footprint For Credit
- Apply For a College Credit Card: To woo the new generations a number of banks are launching credit products for college kids. Often a parent must co-sign this credit card application. Having your name on the card ensures the credit history is in your name. This is one of the best ways to get a loan with no prior history.
- Get an Education Loan: Getting an education loan with a parent as the guarantor is a great way not only to build credit but also to save tax as per Income Tax exemption rules. Once you are working and pay the education loan in timely instalments you start building a good credit record automatically. No need to fret over whether any bank will lend you, you are already handling credit.
- Use Someone Else’s Credit Card: Get enrolled as an authorised additional user on a family member credit card and establish a credit presence. Preferably opt for a card issuer that reports user activity regularly to credit bureaus like CIBIL. With this arrangement, you are not legally bound to pay the outstanding amount, at the same time any credit action is being recorded in your name. Of course, this does not mean that you shirk off paying your dues, treat this as an opportunity to manage money well. Beware of any additional fees that the credit card issuer may charge for adding more users.
- Get a Store Credit Card: A store-specific credit card at your favourite shopping place is relatively easier to get. Many come with attractive cashback offers and add-on goodies. However, make sure you utilise this in a responsible-repayment manner to avoid the high-interest rates for monthly carry over of credit.
- Apply For a Secured Credit Card: A secured credit card requires you to pay the lender some deposit money upfront as a collateral. Your credit limit is then set on your card according to the deposit amount. As a first-time earner, this is a great tool to learn the nuances of credit and build good credit habits. Start out by making small purchases every month and paying off the entire outstanding dues before the due date.
Once you have embarked on your credit journey with any of these means you must maintain your credit worthiness at a high level. Keep the following in mind when managing credit:
- Pay on Time Every Month: Each month, every paisa – pay it off on time and in full to help build a good credit score. It indicates your responsible attitude towards money management and you will get further loans more easily.
- Avoid Numerous Accounts: Whether credit or debt-loans, higher the number of credit sources you rely on the greater the hit to your credit score. This is because each time you apply for a credit source, a search is made in your credit report. Each such search leaves a record at credit agency i.e. a footprint on credit file and this reduces your creditworthiness. Keep your credit lines to a minimum number and manage those well.
- Assess And Reassess: Keep tracking your score every month for at least six months to build a considerable credit history. You should aim to apply for an unsecured credit card after following the above-mentioned methods for a year.
Building credit from scratch requires proper planning and ongoing discipline. But once you build a good credit score and maintain it, a world of opportunities will open up.