Here are four simple tips
A good CIBIL score is no longer an option in the day and age that we live in today. If you are just starting out in life it will only be a matter of time when you think of buying a house, car and taking credit for the same. A good CIBIL score of 750 and above will then open up doors for you and you will be able to get a loan at competitive rates of interest.
However, anecdotal evidence suggests that those who are in their 20s are most likely to fumble on credit, because they do not have adequate information about what impacts their CIBIL score. Thus as soon as they lay their hands on credit, more often than not with their first credit card and before they know it, the damage is done. So that you do not falter with your CIBIL score, here are some pointers that will help you build a good credit profile and help you end up with a good CIBIL score right from the start.
Understand what impacts your CIBIL score
Before you know about what to do to use credit well, you need to understand how CIBIL score works and what impacts your CIBIL score. There are a lot of factors that impact your CIBIL score in various measures. Here is the crux of it...
Your payment history: This has a 35 per cent weightage in your CIBIL score. Thus whatever credit you use, it is of utmost importance to make timely repayments on the same.
Credit utilisation: This has a 30 per cent weightage on your CIBIL score. Simply put, this means the total amount of credit you are using as compared to the total amount made available to you. Ideally your credit utilisation should be in the range of 30-40 per cent.
Age of your credit: This has a 15 per cent weightage on your CIBIL score. The longer the record you have of servicing your credit well, the better it is for you.
Mix of debt: This has a 10 per cent weightage on your CIBIL score. The kind of debt you are using also matters to your CIBIL score. Ideally you should have a good mix of secured and unsecured debt. This means a home loan and a couple of credit cards or a car loan and a personal loan. Too many unsecured lines of credit, such as credit cards and personal loans are bad news and may have a negative impact on your CIBIL score.
Number of inquires: This has a 10 per cent weightage on your CIBIL score. Every time you apply for a new loan or a credit card, the lender in question makes an inquiry on your CIBIL report. This is called a hard inquiry. Too many such hard inquiries makes you seem 'credit hungry' and shaves off you CIBIL points.
Choose your first credit card wisely
Now that you have understood what impacts your CIBIL score, you must be eager to build a good CIBIL score yourself. Unlike popular perception, credit cards are not evil and can prove to be an important tool for credit building, as long as they are used well. You, on your part must do your part to carry out enough research before you pick out your first credit card.
You should check out not just the rate of interest that the card is charging you, you should also check out factors such as fee, reward points and the likes and get a card that is best suited to your profile.
For instance, if you intend to use your credit card for purchasing fuel, get a card that has the highest fuel surcharge. Also, do not fall for teaser offers such as waiver of annual fees in the first year that card issuers try to entice you with. There are cards that have no annual fee at all, but come with a lower credit limit. When you are starting out, such a card may be ideal for you. Once you take your credit card, it is important to use it well, so make it a habit to spend small amounts on your card and pay your outstanding amounts in full each time before the end of your billing cycle.
Clear your education loan
The cardinal mistake that most young people make is that, they immediately switch over to a life of luxury as soon as they get their first job and become slack about the repayment of their student loans, that they had taken to pursue a higher education. If you have a student loan running when you get your first job, make it a priority to clear your outstanding loan as soon as you can. Live the frugal life that you did as a student and try and prepay the education loan that you had availed of. Not only will you have the pleasure of being debt free, it will be a great way to build your credit profile as well.
Inculcate good financial habits
This is a no brainer, but the crux of building good credit and maintaining a good CIBIL score. Just like you have to eat healthy and exercise in order to build your physical health, similarly, you must maintain good financial habits with regards to your credit such as timely repayments of all your credit, especially your credit card, keeping your credit utilisation low and maintaining a good mix of credit. Finally, and most importantly, keep a strict vigil on your CIBIL score and CIBIL report and make it a habit to check your CIBIL score periodically.
Just inculcating good financial habits will ensure that your CIBIL score remains high not just as you begin your life independently, but through the rest of your life.
Photograph: Rediff Archives
The author is Co-founder and Director Credit Vidya.