In the modern world, having a strong credit history and credit score is vital for financial stability and access to various financial products. However, in the Indian context, there are specific considerations to keep in mind when building credit. Did you know that as of 2021, only about 4% of the Indian population had a credit score above 800? This statistic highlights the importance of understanding how to effectively establish and maintain a solid credit history.
For instance, a high credit score can help you secure lower interest rates on loans, while a poor credit score may result in limited credit options or higher borrowing costs.
Let us explore practical tips and strategies to help you build a strong credit history and improve your credit score:
1. Understand the Basics of Credit:
Before we delve into building a strong credit history, it’s crucial to understand the basics of credit. In India, credit history is maintained by credit bureaus such as CIBIL (Credit Information Bureau India Limited), Experian, Equifax, and CRIF Highmark. These bureaus collect information about your credit accounts, payment history, and outstanding debts, among other factors, to calculate your credit score.
2. Establish Credit Early:
Start building your credit history as early as possible. You can begin by opening a basic savings account or a fixed deposit account with a bank. This demonstrates your financial stability and establishes a relationship with the bank, which may benefit you in the future when you apply for other credit products.
3. Apply for a Secured Credit Card:
If you’re new to credit or have a limited credit history, consider applying for a secured credit card. A secured credit card requires you to deposit a certain amount as collateral, which becomes your credit limit. By using the card responsibly and making timely payments, you can gradually build a positive credit history.
4. Pay Your Bills on Time:
One of the most crucial factors in building a strong credit history is paying your bills on time. Whether it’s your credit card bills, utility bills, or loan EMIs, ensure you make timely payments every month. Late payments can have a negative impact on your credit score and may make it difficult for you to obtain credit in the future.
5. Keep Credit Utilization Low:
Credit utilization refers to the percentage of your available credit that you’re currently using. It’s advisable to keep your credit utilization below 30% of your credit limit. High credit utilization suggests a higher risk to lenders and can negatively affect your credit score. Regularly monitor your credit card balances and make timely payments to maintain a low credit utilization ratio.
6. Maintain a Diverse Credit Mix:
Having a diverse credit mix can positively impact your credit score. It demonstrates your ability to handle different types of credit responsibly. For example, having a mix of credit cards, loans, and retail accounts can showcase your financial discipline. However, avoid taking on too much credit at once, as it may signal financial stress.
7. Limit Credit Applications:
Each time you apply for credit, it triggers a “hard inquiry” on your credit report. Multiple hard inquiries within a short period can lower your credit score. Therefore, be selective and apply for credit only when necessary. Instead, focus on building a positive credit history and maintaining healthy credit habits.
8. Regularly Check Your Credit Report:
Reviewing your credit report periodically is essential to ensure its accuracy. You can obtain a free credit report once a year from each credit bureau in India. Check for any discrepancies, errors, or fraudulent activities. If you spot any inaccuracies, report them to the respective credit bureau and get them corrected.
9. Avoid Settling Debts:
Settling your debts for a lesser amount than what you owe may seem tempting, but it can have a long-lasting negative impact on your credit history. It is advisable to repay your debts in full and on time. If you’re facing financial difficulties, reach out to your creditors and discuss alternate repayment options before resorting to settlements.
10. Patience and Persistence:
Building a strong credit history takes time and persistence. Stay committed to maintaining healthy credit habits, such as making timely payments and managing your debts responsibly. Over time, your credit score will gradually improve, enabling you to access better credit opportunities.
11. Avoid Closing Old Credit Accounts:
Closing old credit accounts may seem like a good idea, but it can actually harm your credit score. Length of credit history is an important factor in determining your creditworthiness. Instead of closing old accounts, keep them open, even if you no longer use them frequently. This demonstrates a longer credit history and contributes positively to your credit score.
12. Limit New Credit Applications:
While it’s important to have a diverse credit mix, it’s equally important to limit new credit applications. Applying for multiple credit accounts within a short period can raise concerns about your financial stability and lower your credit score. Take a thoughtful approach and apply for credit only when necessary.
13. Regularly Update Your Contact Information:
Ensure that your contact information, including your address and phone number, is up to date with all your credit accounts. If a lender or credit bureau needs to reach you regarding any account or credit-related matter, it’s essential that they have accurate contact information. This can help you avoid missing any important notifications or inquiries.
14. Be Mindful of Joint Accounts and Guarantorships:
When you become a joint account holder or a guarantor for someone else’s credit, it means you are equally responsible for the debt. If the primary borrower defaults or makes late payments, it can negatively impact your credit history and score as well. Before entering into such arrangements, carefully consider the financial implications and ensure trust and reliability in the primary borrower.
Building a strong credit history and credit score requires discipline, knowledge, and responsible financial management. By implementing these strategies, you can gradually build a positive credit profile.
These tips are brought to you by HappyWise Financial Services.