A First-Time User’s Guide to Establishing Credit

As a new entrant into the world of your own money and credit, here’s a quick primer about the basics to establishing a good credit record. Firstly, what is credit? Put simply, credit is a loan. The kind of credit you can get will depend on your CIBIL score. The higher it is, the more creditworthy you are from a lender’s perspective. So, what is it? Your CIBIL score is a three-digit number that a lender looks at to assess how risky a borrower you could be. The higher your score, the better your access to being approved for loans/cards and competitive interest rates. Your CIBIL score is also backed up by a CIBIL report - a detailed summary of your credit profile, access and repayment history, credit accounts, and balances. Logically, a clean and prompt payment history delivers a better score, and vice versa.

CIBIL Score, CIBIL report, access to credit, why are all these concepts important anyway? Because credit today touches nearly every aspect of our lives – from buying a home, starting one’s own business, or enrolling for higher education. Relying on credit is now a way of life and it’s tightly woven into our spending patterns.

Let’s dive in now into the ways by which you can get off to a good start on your credit profile.

1. Apply for a consumer durable loan: If you have not used credit before, you will not have a history that lenders can refer to for granting a loan. You can create one by taking a consumer durable loan of a smaller amount (such as a smartphone purchase on EMI) that can be easily repaid.
2. Use the pay later option: This is a popular trend amongst consumers today. If you opt for a pay later option on any ecommerce site, it will be considered as a credit facility and reported to the credit bureau. By establishing credit, you can begin to build your credit profile.
3. Apply for a credit card from the same bank where you have a salary account: A bank that already has your salary account is in a better position to offer you a credit card, primarily because you already have a relationship with them.
4. Apply for a secured credit card: A good way to start building your CIBIL Score is to get a credit card against fixed deposit. This type of credit cards are technically termed as Secured Credit Cards. Each bank specifies a minimum fixed deposit amount to apply for a secured credit card. The amount in your Fixed Deposit account is directly linked to the total credit limit on your credit card.
5. Access credit responsibly: If you are a salaried individual, you may be receiving offers for credit cards with cash-back benefits and higher credit limits. The key is in knowing whether you truly need so many credit cards or not. The advice is to start using one credit card responsibly to create a favorable credit history.

Once you have established a credit footprint, make sure you follow healthy credit habits to maintain a positive credit profile for continued credit access.

• Check your CIBIL Score and Report regularly.

Too few credit users take full advantage of the information contained in their CIBIL profile. Having a good grasp on your credit information and checking your CIBIL score and report regularly can help you get ahead in life and save you time and money. This is called Credit Monitoring, and monitoring your CIBIL Profile frequently helps you stay informed of any changes to your profile. Such as, new accounts being opened in your name, a credit card balance increase, or an overdue payment reported by one of your creditors. This practice keeps you well informed and aware about the health of your credit profile, and it’s a great habit to develop early on.

• Apply for credit only when you need it.

A lender typically performs a hard enquiry to assess your creditworthiness every time you apply for credit. Multiple and frequent hard enquiries by lenders may negatively impact your CIBIL Score. By applying for credit only when you need it, your score remains stable the rest of the time and presents an overall view of a responsible credit user.

• Pay in full and on time.

Don’t avail the option of part payments and get into the practice of racking up interest on the unpaid bill. It’s harmful to your score and the interest burden can become wildly expensive in the long run.

Building a healthy credit profile is like running a marathon. Regardless of the methods you choose, remember consistency is the key. By following a carefully planned roadmap, you can move several steps towards creating your credit footprint and becoming credit-worthy.