20 August 2020
Humans are creatures of habits, and it is these very habits that have the potential to build a positive credit score. Early in our lives, lessons from our family and their experiences shape different aspects of our lives, including our financial habits – such as spending and borrowing. However, building a positive credit profile is much more than spending and borrowing, and doesn’t happen overnight. While it is indeed possible to get a loan without a credit score, you need to practice responsible credit behavior consistently.
Uncertain about how to begin? Here are 5 credit habits you should keep in mind to build a positive credit score.
Planning financial goals and weighing all credit options is essential to provide for our families and loved ones. Most lenders evaluate your repayment capacity from your debt-to-income ratio. Hence, plan your financial goals and prioritize them. Try to keep your debt obligations much lower than your income. Ideally, you should consider keeping your income to EMI ratio before borrowing and strive to keep this under 30%.
You should apply for credit only when you really need it and have repayment capacity. Be cautious about how frequently you apply for credit cards. Having a credit card with an extended credit limit is great, but it is a good credit habit to maintain a low credit utilization ratio and spend well within your card limit. Higher credit will only increase your credit burden and may impact your repayment capability later.
Always keep track of your credit transactions, especially your credit card activity. Try not to max out your credit lines. You can also opt for automatic payments and an emergency fund to avoid late payments. In a nutshell, anything that would indicate non-performance of a liability harms your credit score.
Budgeting monthly and annual expenses, loan obligations, and repayments help you save up for rainy days. This will also help you stay on top of payments and show lenders that you’re responsible with credit. Payment history is one of the most influential factors with the CIBIL score. The thumb rule is to have about three months’ of salary stashed away as an emergency fund and avoid defaults, repossessions, foreclosures, and third-party collections. This fund will also help you meet your credit obligations and unexpected expenses during adverse times.
Old accounts are like old friends who should not be forgotten as they show the length of your credit history. Holding an account for longer is a good credit habit as your credit score also depends on your credit utilization ratio. Hence, closing credit accounts often may lower your available credit and harm your credit profile. Consider keeping accounts open if they have a good payment history and a low or zero balance.
It is vital to maintain a balanced credit mix of secured and unsecured loans. An unsecured quick loan can help you bridge short-term credit needs, so try and balance by taking secured loans like car loans or home loans to balance the portfolio and have a positive credit score. However, do not barge in for massive borrowings as they increase your debt burden. Apply for different types of loans depending on your need and develop a credit score.
Once you begin your credit journey by availing a loan or taking a credit card, a credit footprint is created. This footprint is instrumental in building your credit score and CIBIL Score. The CIBIL Score is a 3-digit numeric summary of your credit profile. It ranges from 300 to 900. It reflects your credit behavior and habits over time. It is important for you to showcase and leverage good credit habits as lenders evaluate your credit profile, behavior patterns, and repayment habits using this CIBIL Score.
The best way to develop good long-term credit habits is through financial discipline. It is important to work towards a positive credit profile, and you may notice how this brings about a positive impact on other aspects of your life too. Check out our beginner’s guide to borrowing and credit if you’re looking to get started.
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