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Updated: Mar 2, 2018
Nilesh has shortlisted his dream home and decided to apply for a home
loan. His loan application was rejected. After enquiry, he got to know
that his credit report has some outstanding payments from an old
credit card that he thought he had closed. These outstanding payments
have had a negative impact on his credit score. If this looks familiar
to you, then read on, how to build a credit history and maintain it so
that you do not fall into similar situations:
When you apply for a loan or a credit card, the lending institution
checks your credit history before deciding to lend to you. Your credit
history is provided by the Credit Information Company (or credit
bureau), which the lender uses to assess your risk as a borrower and
accordingly decide whether to approve the loan application or not.
The credit bureau determines a credit score based on your previous
credit history, your current debt levels, the amount of time you have
had the credit, the types of credit you have available and your
pursuit of a new credit. Credit information companies have developed
their individual credit scores, which is typically a three-digit
number that represents a summary of individuals' credit history and
credit rating. This score ranges from 300 to 900, with 900 being the
best score. Indiscriminate spending on the credit cards, utilising the
large credit limits and being undisciplined about repayment can
adversely impact the credit score.
It is important to start building a credible credit footprint to
allow you the option of securing credit when needed. To get started,
here are a few things for you to consider:
Building a credit history: If you have never taken any kind of credit
at all, then there is no record of you in the credit bureau. If your
financial institution declines your regular credit card application
citing lack of credit history, you can apply for credit card against
fixed deposits (FD). FD acts as a security and bank is more confident
to issue a credit card even when there is no credit track record for you.
Once you have availed any credit card or loan, then do keep the below
pointers in mind to ensure that you build a positive credit history
and good credit score. If you are not financially responsible, you may
be denied any future loans or credit cards.
Timely payments: A good step in building a credit history is timely
payments of your credit card bills and other EMIs. If you have a
credit card and don't pay the minimum amount of your credit card bill
on time, it will possibly impact your credit score negatively.
Be prudent and avoid defaults: Avoid default on a credit card or a
loan instalment since that will negatively impact your credit report
and score. The new lender can see all your previous defaults on other
lenders your credit report. The credit reports also reflect the
details about the settlement of default payments with your previous bank.
Be smart while spending: Don't go overboard with spending during the
festival and holiday season. Along with the retailers and e-commerce
companies, in the festive season, the financial institutions will come
up with many offers on credit cards and personal loans to help you
make the most of your shopping. You need to avail the offers
judiciously keeping in mind your income and ability to pay. If you max
out your credit cards, it will have a negative impact on your credit score.
Limit unnecessary inquiries: It is advisable to limit your inquiries
for loans or credit cards. Shopping for loan/credit card should not be
indulged in case one is not really interested in taking the
Build a good mix of loan types: Instead of just having a credit card,
try to avail different types of loans like personal loan, home loan,
auto loan etc. A healthy mix of loans may get a higher weighting in
credit score versus a person with only one kind of loan. Obviously, do
this keeping in mind the above-mentioned to-dos of timely payments,
avoiding defaults and not maxing your credit utilisation.
Check your credit report regularly: Start making a habit of checking
your credit history regularly and looking through your credit report.
You can get a credit report from the credit bureaus through their
websites. If you find any information in the report that you do not
recognize, you should contact the respective credit bureau to dispute
the same. The credit bureau, in turn, will contact the relevant
financial institution to raise your dispute.
In addition to telling you more about what's going on your credit
score, checking your report can work as an early-warning system for
identity theft. As you start establishing your credit history, keep in
mind that you should only apply for credit that you can afford to pay
back. Being financially smart will work for you in the long run.
GET THE BEST CREDIT SCORE
- Start making a habit of checking your credit history regularly and
looking through your credit report
- Avoid default on a credit card or a loan instalment since that
will negatively impact your credit report and score
- A good step in building a credit history is timely payments of
your credit card bills and other EMIs
The writer is head of business development & strategy, Equifax