Whenever you apply for a credit card or loan, lenders check your credit score and examine your credit history to determine your creditworthiness. It indicates how well you have handled credit in the past. Hence, maintaining a strong credit history is important to qualify for better credit cards or loans at lower interest rates. However, if you have never applied for a loan or credit card, you would not have a credit history, which in turn, could limit your options and make it difficult for you to avail credit.
So, if you are just getting started, here are a few tips that will help you build a good credit profile:
Apply for a credit card
Credit cards are the easiest and the most common way to begin your credit journey. While most issuers offer credit cards to individuals with a strong credit history, some issuers also offer credit cards to new-to-credit consumers. Beginners will have better chances of approval if they already have a relationship with the bank, such as a fixed deposit or a salary account. Most banks offer entry-level credit cards to the beginners but, depending on the applicant’s income and employment, they might extend better credit cards to select individuals.
Although unsecured credit cards are the best way to build a strong credit history, beginners may not qualify for them as they come with comparatively stringent eligibility criteria. Those who are not eligible for an unsecured card can also consider applying for a secured credit card. Secured cards are offered against collateral, such as a fixed deposit, which acts as security in case you default on credit card bills. You can apply for a credit card through Paisabazaar Marketplace where you can compare and choose the best card as per your needs.
Consider taking short-term personal loan or consumer durable loans
Another way to build a strong credit history is by taking a short-term personal loan or consumer durable loan, which you can easily repay as per your financial capabilities. Short-term loans usually range from a few months to a couple of years and can help you build your credit history. By opting for a short-term loan and consistently making timely payments, you can start your credit journey and build a strong profile over a period. However, it is not recommended to apply for a loan if you do not need it as loans typically come with high interest rates. You should take a loan only when you actually need it.
You can also opt for a consumer durable loan to finance big-ticket purchases like electronics, furniture, etc. Through a consumer durable loan, you do not only lessen the burden of paying the full amount at once but also build a strong credit profile by making payments on time.
Ensure timely payments
The most important factor in your credit profile is your payment history. To build strong credit, you must always make on-time payments and pay your balance in full each month. Missing a credit card payment not only leads to high interest charges and subsequent debt but can also damage your credit score, as missed payments are mentioned in your credit report’s ‘Days Past Due (DPD)’ section.
Moreover, many credit card users think that paying only the minimum amount due is enough. However, paying only the minimum amount due means carrying the remaining debt to the next billing cycle and accumulating interest charges on the remaining balance and the new purchases as well. As payment history has the highest weightage among other factors that are considered while calculating your credit score, frequent missed or late payments can have adverse effects on your credit history.
Also Read: Here is the best time to pay your credit card bill
Limit new credit card applications
Individuals often think that applying for multiple cards can help them increase their purchasing power. However, this can have adverse effects, as applying for multiple credit cards at a time can negatively impact your credit score. Every new credit card application initiates a hard inquiry on your credit report. While a single inquiry may not have significant consequences, multiple inquiries within a short period of time can temporarily lower your credit score. Also, applying for too many credit cards represents credit-hungry behaviour and shows that you are not managing your credit responsibly. Therefore, you should start your credit journey with one credit card initially and be selective about it. Get a credit card that aligns with your spending behaviour and preferences.
Once you begin your credit journey, check your credit report at regular intervals to see the progress. Thoroughly reading your credit report will also help you spot errors and get them rectified at the earliest. You can download a free report annually from any of the credit bureaus or from third-party platforms.
