Unable to get a loan? Build a proper credit history with secured card

First-time borrowers should start a fixed deposit and get a credit card against it

The Reserve Bank of India (RBI) said recently in its monthly bulletin that lenders find it difficult to extend credit in the absence of borrowers having a credit history. A good credit history has emerged as a significant factor for lenders while making lending decisions.

“Your credit history is one of the most important factors banks and non-banking financial companies (NBFCs) consider while processing your application for a loan or a credit card. A strong credit history that displays responsible behaviour with credit can help you get offers for loans at low interest rates. With a healthy credit history and a high credit score, you can also borrow a higher amount, though factors like existing debt and current income also play an important role here,” says Radhika Binani, chief product officer, Paisabazaar.

 

Eligible for pre-approved offers

Many banks offer ‘on tap’ credit facilities or pre-approved loan offers to their clients. They rely on their experience with clients and the client’s credit history. “If you have a high credit score, you may be eligible for pre-approved offers for loans that would require zero or minimum documentation. Disbursal is also quicker,” says Binani.

In the absence of credit history, you may not get such pre-approved loan offers. Worse still, lenders may be cautious about lending to you.

Get a credit line

The easiest way to develop a credit history is to avail of a credit card and use it prudently. “One effective approach is to apply for a credit card from the bank where your salary is deposited or where you maintain an account. These banks are more inclined to extend credit cards to existing customers. Initially, the credit limit might be modest, but it’s a good starting point,” says V Swaminathan, executive chairman, Andromeda Sales and Apnapaisa.com.

Go for a secured card

If you find it difficult to obtain a normal credit card, acquire an asset-backed credit card, also called a secured credit card. A bank may offer you a credit card against your fixed deposit. For example, if you have a fixed deposit of Rs 2 lakh, the bank will happily offer you a credit card with a limit of, say, Rs 1.5 lakh. “Since it’s a secured card, not having a credit history will not impact your eligibility. You can then use it to build your credit profile,” says Binani.

Building history takes time

Credit history is built over time by using the available credit line in a responsible manner. “Building a credit history is a gradual process that requires at least 6-12 months of consistent credit activity,” says Swaminathan.

Aman Kapoor, a credit expert, says: “Timely payment is the most important element in building a good credit score. In addition, don’t take loans beyond your capacity to repay.”

Build score, then keep it

Credit score ranges between 300 and 900. A score above 750 is considered good. To maintain a good score, besides repayment discipline, you must also keep your credit card usage within reasonable limits. A lower credit utilisation ratio helps your credit score. The credit utilisation ratio is computed by dividing the credit card outstanding by the credit card limit.

“Keep your credit card spending under check. This is where most people falter and fall into a debt trap. Limit your spending to 30 per cent of the card limit,” says Kapoor.

If, for instance, your credit limit is Rs 1.5 lakh, then your ideal spend per month should not exceed Rs 45,000.

While you are trying to build your credit score, do not apply for multiple credit lines. “Multiple applications for credit within a short span of time display credit hungriness and can reduce your credit score,” says Binani. Even if a bank offers you another credit card, shun it.

Check credit report regularly

Check your credit report at least once every quarter

Such checks will ensure your credit score is good enough to get you a loan whenever you need one

Remember it could take two-three quarters to improve your credit score if it is poor

Checking your report regularly will also enable you to spot identity thefts (cases of fraudsters impersonating you and taking a loan)

If you have not applied for a loan but your credit report shows an enquiry, be warned that somebody is trying to misuse your profile

Checking your credit report regularly will also make you aware of lapses on your part (such as a missed payment) and on a lender’s part (say, delayed processing of a payment causing you to miss your due date)