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How to make credit score work for you

  • If used carefully, borrowing can be a healthy habit to build a good credit score. But you need to pay on time
  • In later stages of your life when you apply for bigger loans with lower interest rates or credit cards with higher limits, make sure you don’t have a zero credit history

Mumbai: Are you wary of credit cards, burden of loan EMIs or anything that is remotely related to the word credit or loans? Turns out, taking some credit is not all that bad and moreover, it is actually essential to build a good credit profile.

“Whenever you apply for a credit product such as a credit card or a loan, your credit score plays a significant role in the approval process. It is imperative that you maintain a good credit history to improve your chances of approval," said Gaurav Chopra, founder and chief executive officer, Indialends, a Gurugram-based fintech company.

However, do you think that by avoiding credit you are close to building a credit score? “If you have no credit history, lenders will be hesitant in lending to you as they won’t be able to evaluate your ability of repaying the borrowed money. Another downfall can be that the interest on which you are provided credit may be very high," Chopra added.

Therefore, maintaining a credit score makes you a positive and potential loan candidate in future.

“After some months of observing the credit utilisation pattern and repayment cycle, if found disciplined, credit limit is enhanced. Higher credit limit availability to an individual positively impacts the credit score," said Satyam Kumar, co-founder and CEO, Loantap, a Mumbaibased fintech start-up. Hence, it is important that in later stages of your life when you want to apply for bigger ticket loans with lower interest rates or for credit cards with higher limits, make sure you leave something for the firms to analyse and do not have a zero credit history.

Zero credit history simply means you have not transacted in any kind of credit or lending products in the past.

“To avoid this catch-22 situation at the time of an emergency, start working towards building your credit score now. You can start by availing either a credit card or a small ticket-size loan with low interest rate," said Chopra.

New age digital lenders use artificial intelligence and machine learning to build credit score.

“Such in-house rating mechanisms are independent of credit scores offered by CIBIL and others. On platforms like these, the digital footprint of a person is assessed in order to know the creditworthiness of the individual. For instance, the number of Facebook friends, public interactions on social media, education, remuneration and career," said Ketan Patel, CEO, CASHE, a Mumbai-based fintech firm.

However, while you are beginning the usage of your first credit card or applying for small-ticket loans at an early stage, there are a few things you can keep in mind.

“While opting for a credit card, do not forget to pay your bills on time. Also, don’t use the credit limit to its fullest capacity as high credit utilisation impact credit score negatively," said Chopra. Some of you may also open multiple bank accounts to spread your debt from multiple credit cards. “This behaviour reflects hunger for credit and a risk of high debt involvement and thereby impacting the credit score negatively," said Chopra.

“Credit cards offer you interest-free period on purchases, which means as long as you pay the amount well within the due date you won’t have to pay any interest on your expenditure.

“Since RBI has mandated banks to provide customers with three days grace period, you won’t incur any late payment charges during this time as well and your credit score won’t be impacted by this delay as banks won’t report the late payment during the grace period," he said.

The same rules apply for when you apply for loans. “Be careful of your loan amount, pay EMIs on time and do not apply for too many loans or you may look credit hungry," Chopra added.

Presently it is practically difficult to not have financial digital footprints. “If you are working, have job stability and your income is steadily increasing and have low FOIR (fixed obligation to income ratio), it is not very difficult to apply for credit cards or personal loans to online lenders," said Kumar. FOIR is a parameter used by banks to determine your loan eligibility.

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