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Things youngsters should know before building credit score correctly

06-Jun-2018 written by : FSI-Team

Building credit score correctly

As a youngster, one has several things on the top of one's mind- classes, lectures, social life, job search, and other responsibilities. While juggling between all this, building a credit history may be the last thing on one's mind. You may have heard it from your parents that one needs a good credit score in order to get approved for loans and credit cards. In fact a good score is needed to unlock a number of financial opportunities in life.


It is needed to get the best interest rates on loans. Landlords check your score to assess whether you will pay rent on time. Employers too check your report to gauge whether you are a financially responsible person or not.


So just after you leave college, you will realize the importance of good credit score, when you want to rent a house, seek employment or get a home and car financed. Building credit history takes a lot of time and patience. The earlier you start this process the better it is. Here are some things that you should know before you start your journey of building good credit.

1. Understand the basis of CIBIL score calculation

The Credit information companies maintain a repository of information of all your past loans and credit card accounts. They record the details of your repayment behaviour and based on the credit report they calculate the credit score. Your CIBIL score is affected by the following factors-

  • Payment history- Timely payments helps to increase CIBIL score whereas late payments hurt your score.
  • Credit utilization ratio- This ratio is based on the amount of debt that you owe compared to your overall credit limit. Lower the ratio better it is for your score.
  • Account mix- Experience in handling both revolving as well as instalment credit accounts proves to be a boon for the credit score.
  • Average age of accounts- The longer the period for which you are handling credit, the better it is for the score.
  • New credit- How often you apply for new credit also affects your score. Too many enquiries can hurt your score.

2. Authorized user

When you are starting your journey of building credit, you may not get approved for credit cards or loans, since you do not have any past history of credit behaviour. A good way to start on is to ask your family members or friends with a good credit record, if they are willing to add you as an authorized user. Even if you do not use that card, the primary card holder's activities will get recorded on your report and help boost your score. Make sure that the primary card holder follows healthy credit habits. If he misses payments or racks up too much debt it may harm your score.

3. Secured credit card

It is easy to get approved for a secured credit card even if you do not have a credit history. A secured credit card is backed by a deposit that you pay initially. Use the card for small purchases every month and pay it off on time to build a solid foundation of your credit.

4. Use credit cards wisely

When you get approved for a regular credit card, remember it is not the licence to buy things that you cannot afford. Make a budget and stick to it. Purchase things only if you think you can afford to pay for it. The interest rate on outstanding balances is very high. So pay down the full balance on the credit card every month. This will help increase CIBIL score. Carrying balances will significantly increase your debt and it will soon become unmanageable. Moreover a high credit utilization ratio will bring your score down. On time payments is the most important thing that you can do to build credit. You can consider setting up automatic transactions so that you never miss a payment.

5. Monitor your credit health

You are entitled to a free credit report from all the credit bureaus once every year. Make it a point to check your credit report regularly to keep a tab on any potential fraudulent activity. Check whether the information recorded is accurate. Find out what your score is. If it isn't up to the mark, analyse the report to find out the reason for the same.

When you are starting your journey, go slow and play safe. Do not take on more than 1-2 credit cards and a small loan. Managing too many debts at once may become overwhelming. Once you get a hang of things you can diversify your credit profile and take on more opportunities to build credit.


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