Proven Credit Building Tips for Young Adults to Start from Scratch

Picture this: You’re at the threshold of independence, ready to conquer the world of adulthood. But as you navigate this exciting new chapter, there’s one vital aspect you can’t afford to overlook – building credit. In India, where credit holds significant sway over financial opportunities, establishing a robust credit history is your passport to a myriad of possibilities, from securing loans to renting your dream home.

Interestingly, as of FY22, the average credit score in India was 715, with nearly 46% of millennial and Gen Z users reporting improved scores, signaling a growing trend toward better credit management among younger demographics. Additionally, 43% of retail credit inquiries in late 2022 came from consumers aged 18-30, highlighting the increasing influence of young borrowers in the credit market. [Source: Incred]

With 64% of young adults in India acquiring their first credit product before the age of 30, and 37% doing so before turning 25, it’s clear that starting early is crucial. [Source: Business Standard]

But where do you begin? Fear not, for we’ve curated a comprehensive guide tailored specifically for young adults. So, are you ready to unlock the secrets of building credit from scratch? Let’s dive into these Credit Building Tips:

Effective Credit Building Tips for Young Adults:

Understand How Credit Works:

Before diving into building credit, it’s essential to understand what credit is and how it functions. Credit allows you to borrow money or access goods and services with the commitment to repay later, often with interest. In India, credit is quantified through credit scores provided by agencies like CIBIL (Credit Information Bureau India Limited), Experian, and Equifax.

A credit score reflects your creditworthiness and is influenced by factors such as your payment history, credit utilization, and length of credit history. Understanding these basics helps you make informed decisions, manage your finances effectively, and build a solid credit foundation.

Apply for a Secured Credit Card to Boost Your Credit Score:

One effective way to start building credit is by applying for a secured credit card. Unlike regular credit cards, secured cards require a security deposit that acts as collateral in case of default. This deposit usually serves as your credit limit.

Using a secured credit card responsibly—making timely payments and maintaining a low credit utilization ratio—helps establish a positive credit history. Over time, this responsible usage can lead to an improved credit score and the opportunity to upgrade to an unsecured credit card, which offers greater flexibility and benefits.

Credit Builder Loans can Help Build a Quality Credit Score:

Credit builder loans are specifically designed for individuals with no credit history or low credit scores. These loans involve borrowing a small amount of money, which you repay in regular monthly installments.

The lender holds the funds in a savings account or certificate of deposit (CD) until the loan is fully repaid. Your timely payments are reported to credit bureaus, helping to build your credit history and improve your credit score. This type of loan is a practical option for establishing or rebuilding credit, showcasing your reliability to future lenders.

Become an Authorized User:

Becoming an authorized user of a credit card account held by a family member or close friend is a strategic way to build credit. As an authorized user, you benefit from the primary cardholder’s positive credit history, which can enhance your own credit score.

However, it’s crucial to choose someone who maintains good credit habits, as their financial behavior will impact your credit as well. Responsible management of the primary account—such as timely payments and low credit utilization—will help ensure that your credit score improves and reflects your reliability

Paying Your Bills on Time Helps Build a Good Credit Score :

Paying your bills on time is fundamental to building and maintaining a good credit score. While utility bills, rent, and mobile phone payments may not directly impact your credit score initially, many lenders consider your payment history when assessing your creditworthiness.

Consistently making timely payments demonstrates financial responsibility and can positively influence your credit score over time. It’s important to set reminders or automate payments to avoid missed due dates, as even one missed payment can have a negative effect on your credit profile.

Keep Your Credit Utilization Low:

Credit utilization refers to the ratio of your current credit card balances to your total available credit. To maintain a healthy credit score, it’s advisable to keep your credit utilization below 30%. This indicates to lenders that you are not overly reliant on credit and manage your finances responsibly.

For instance, if you have a credit limit of ₹50,000, aim to keep your outstanding balance below ₹15,000. Lower credit utilization helps demonstrate financial discipline and improves your credit score, making you a more attractive borrower.

Monitor Your Credit Report Regularly:

Regularly monitoring your credit report is crucial for maintaining a healthy credit profile. You are entitled to one free credit report per year from each credit bureau in India, including CIBIL, Experian, and Equifax. Reviewing your credit report allows you to check for accuracy, spot any errors, and identify potential fraudulent activities.

Promptly addressing discrepancies or unauthorized entries helps protect your credit score and ensures that your credit history reflects your true financial behavior. Staying vigilant can also help you understand the factors affecting your credit score and take corrective actions as needed.

Apply for a Credit Card with a Low Credit Limit:

Applying for a credit card with a low credit limit is a practical step for those new to credit. These cards are generally easier to obtain and can serve as a foundation for building credit. A lower limit reduces the risk of accruing high debt while helping you manage your spending.

Use the card responsibly by making timely payments and keeping balances low to build a positive credit history. Over time, responsible usage can lead to increased credit limits and better rewards, providing a pathway to a more robust credit profile.

Diversify Your Credit Mix:

Diversifying your credit mix can positively impact your credit score by showing lenders that you can manage various types of credit accounts. A well-rounded credit profile includes a combination of credit cards, loans, and other credit types.

For example, alongside credit cards, consider having a personal loan or a vehicle loan. This variety demonstrates your ability to handle different credit forms responsibly and can enhance your credit score. A diverse credit mix reflects your overall credit management skills and can improve your attractiveness to potential lenders.

Avoid Opening Too Many Accounts Too Quickly:

While having a mix of credit accounts is beneficial, opening too many accounts in a short period can be detrimental. Each new credit application triggers a hard inquiry on your credit report, which can temporarily lower your credit score. It’s important to focus on managing a few accounts well rather than applying for multiple credit products at once.

Building a solid credit history takes time and responsible management of existing accounts. Gradually expanding your credit portfolio as needed will help maintain a healthy credit score and demonstrate your financial stability.

Keep Old Accounts Open:

Maintaining old credit accounts can be advantageous for your credit score. Closing long-standing accounts might seem like a good idea but can negatively impact your credit score, especially if they have a positive payment history.

Keeping these accounts open helps extend your credit history length, which is a key factor in your credit score calculation. It also contributes to a lower credit utilization ratio by increasing your total available credit. By preserving old accounts in good standing, you can enhance your credit profile and reflect a longer, more reliable credit history.

Seek Professional Advice if Needed:

If you find yourself uncertain about how to build or manage your credit effectively, seeking professional advice can be highly beneficial. Financial planners and credit counselors offer personalized guidance based on your specific situation, helping you navigate the complexities of credit management.

They can assist with creating strategies to improve your credit score, understanding credit reports, and addressing any financial challenges you may face. Professional advice ensures that you make informed decisions and develop a plan tailored to your financial goals and needs.

Conclusion

Building credit from scratch in India is a journey that requires patience, diligence, and strategic planning. By following the tips outlined in this guide, young adults and newcomers can lay the foundation for a solid credit history that opens doors to various financial opportunities.

From applying for secured credit cards to diversifying credit accounts and maintaining responsible financial habits, each step plays a crucial role in shaping your creditworthiness. Remember, building credit is not a sprint but a marathon, and with perseverance and discipline, you can gradually elevate your credit score and pave the way for a brighter financial future in India.

These tips are brought to you by expert Financial Planners at HappyWise Financial Services.

If you need any assistance in Financial Planning/Tax Planning or want to discuss your investment options, feel free to connect through Email or Whatsapp.

Disclaimer: Some parts of this article may have been generated or modified using Generative AI. This article is not intended as financial or investment advice; its objective is to share information. Readers are encouraged to conduct their own research and consult with a financial planner before making any financial decisions.