Tuesday, 20 October 2015

Three steps for credit newbies to get the ball rolling

If you’ve never taken credit before, your credit score with the country’s leading credit information bureau – CIBIL – will read NH, meaning “No History”. Banks and lenders tend to avoid “NH” applications because of their potential for default and the direct losses the bank will experience as a result. The only way to get credit is to have a good credit history or score – and the only way to get a good credit history or score is by taking credit. It’s kind of a catch 22 situation, but doing these 3 simple things can get you started on the road to financial freedom by slowly helping you build a positive credit record:
  1. Use credit cards carefully: For someone with no credit history, getting a secured credit card is easy and highly useful. But the mistake most new borrowers make is to use their credit cards irresponsibly, by delaying payments and making impulse purchases.

Judicious and careful use of your credit card can take you a long way in building and maintaining a good credit rating and will make you eligible for loans and greater avenues of credit in the future. Whenever you make a purchase, ensure that you will have the funds to pay it off before the due date. If you miss making the payment by even just one day, there will be fines, charges and penalties levied which will damage not only your credit rating, but your financial health as well.

Secured credit cards can be acquired by applying for one against the security of a fixed deposit with the same bank. There will be a minimum deposit amount that will need to be maintained. Using this card regularly for small to medium purchases and paying off the entire amount well before the due date will contribute greatly to your credit score.

  1. Stand as a guarantor or co-applicant for loans: Standing as guarantor means that you are just as responsible for the debt as the applicant. Details of the loan, its repayment and all other specifics are reported to the credit information bureaus for both people, and will reflect in both credit reports. Ensure that the person whose loan you’re guaranteeing is a person you can trust, and one who is responsible with money, as a default on the primary applicant’s part can leave you in the lurch and destroy your creditworthiness.

A successful loan repayment will guarantee positive credit ratings for the applicant and guarantor alike, and can be an argument used in your favour if your loan application is ever denied on the grounds of a less-than-favourable credit rating.

  1. Monitor credit reports: Many people who do everything right and think their credit report is positive are usually in for a nasty shock when they receive their actual credit rating. There have been a number of cases reported wherein the credit information bureaus receive faulty information that reflects negatively in credit reports – this can happen due to a number of reasons including negligence on the part of credit information partners. To make sure that all the details mentioned in your CIBIL report and absolutely true, request a copy of your credit report once every 6 months and immediately correct any errors that you find. If you plan on borrowing heavily in the future, a clean credit report is absolutely vital.
There are many more ways you can build your credit report up to be a reflection of your outstanding ability to manage debt – but you need to be diligent and meticulous in your financial planning. It isn’t hard to do, and the reward is all the credit you need. Lenders will, of course, expect you to behave with the new credit with the same care and control as you did with older, smaller loans.
Managing finances is important, and managing your CIBIL credit score and making sure it always shows you in a good light can be considered a vital offshoot of judicious financial planning. Many employers these days are looking at a stable and well-maintained credit report as an indicator of stability and trustworthiness while reviewing job applications.
If your credit history is non-existent, don’t let it worry you – as you are perfectly poised to write an excellent credit history for yourself on a clean slate.