Are you a millennial, living in a world where technology has influenced almost every sphere of your life? (For starters, ‘millennials’ is a term given to people born between 1981 and 2000.) For instance, the current credit climate has so many options to choose from, all made possible by technological advancement. You have credit cards, loans that can be applied for instantly, transactions that take place in a jiffy, and so much more. On similar lines, it is safe to say that even ‘credit’ has in a way influenced our lives greatly.
Maintaining a good credit profile works to benefit you quite impressively – gives you better access to financial resources, helps you finance assets that you’ve always wished you had, helps you help others, and so much more.
If you are a millennial, here are some hard-to-ignore and proven financial tips that you can put to use and excellently manage your credit profile.
1. More than two credit cards? Well, too much for comfort!
Well, ideally, you should have just one card. It’s not that you’re reading this right now and wondering why this is being said – simply because you can definitely manage debt effectively even with multiple credit cards.
That said, here’s something for a thought – credit card debt has been on an exponential rise in the past 5 years, with a big percentage of millennials getting almost mercilessly buried under mounting credit card debt. And guess, what? It all started with that one card, and wishing to have another, but unfortunately, it didn’t stop there, did it?
So speaking of credit wisdom, have just one credit card. You can have two also – if your income is at least two-fifths of your combined credit limit. Citing an example, your income should be at least Rs 80,000 if your credit limit is Rs 2,00,000 on two credit cards combined.
2. Combining Credit Cards and Personal Loans
As a millennial, I’m sure you would’ve come across numerous blogs telling how it is wise to take a personal loan to clear off your credit card debt. Well, technically, it is a brilliant idea if your intention is to get rid of your credit card debt.
The reason why it can work out well is that interest rates are massively lower in comparison to the annual interest rate on credit cards. Personal loan interest rates start at about 11% p.a. while credit card annual interest rates are at an average of 40% – quite something for a difference
However, there’s something that you already know at the back of your head – considering you’ve cleared your credit card debt completely and have a personal loan with affordable monthly repayments now, the entire purpose is destroyed if you start using your credit card all over again.
Yes, your credit limit is fresh as an egg from the farm, and starting all over again will steer you into unnecessary debt.
3. Your debt to income ratio
Remember, your debt to income ratio is one of the many parameters that influences your credit score. Ideally your monthly repayment quantum should not exceed 35% – 40% of your monthly income.
The moment it overshoots a percentage of 45, you’re sailing toward troubled waters. A situation like this would require you to eliminate one source of debt at a time. Converting credit card debt to monthly EMIs or taking out a debt consolidation loan is a smart move if you find yourself in the midst of a situation like this.
4. Utilisation of credit
Another essential factor that influences your overall credit health is your credit utilisation ratio – the amount of credit used against your available credit limit (mostly in the context of credit cards). Say you have one credit card with a credit limit of Rs 60,000 and another with a credit limit of Rs 50,000. The ideal credit utilisation ratio would be about 40% of your available credit limit, almost similar to your debt to income ratio.
5. Making Timely Monthly Payments
Another tip that doesn’t necessarily have to be said – making timely payments on your loans or credit cards. As much as it affects your credit score if you miss a payment, it also puts the burden of additional penal charges that are quite unpleasant.
While late payments at frequencies not worth talking about are ok, defaults hard you more, causing a serious dent on your credit score.
6. Managing multiple credit accounts – eliminating one debt source at a time
Say you have two credit cards, one personal loan and a secured loan, like a car loan. It’s ok if you haven’t maxed out your credit cards; but if you have, well, trouble is an understatement.
Let’s say you haven’t maxed out your credit cards. The wisest thing then to do is to make 2x the minimum payments on your credit cards (as it takes care of the interest quotient too), and of course, paying your monthly EMIs on your loans. With the amount left on your income, try and clear out the debt on at least one of the credit cards – it might not be possible to do it in just one month. But the point here is to approach your repayments with a view to eliminate your debt sources one by one.
If you’ve maxed out your credit cards, and have two or more loan accounts, you should hope your income is good enough. If you’ve sunk too deep into debt, the ideal solution here would be a debt consolidation loan.
7. Overspending on credit cards and applying for new loans
It’s always too tempting to spend through your credit cards. Online shopping, subscriptions, outings, vacations – so many ways to use available credit. It is of course quite a difficult practice to live by your means and spend what you have – duh! Whoever said that?
Exercising restraint will take you a long way in maintaining a good credit profile. Know that your credit score and your spending habits speak a lot more than you think about your personality and character.
Credit as such has substantially influenced growth and overall economic health. The same has trickled down to us individuals, and over time, has come to be a major part of our individual lives. Having a good credit score is more important than originally thought. For, banks and financial institutions use this very score to determine your eligibility for any form of future credit.
(By Aditya Kumar, Founder & CEO, Qbera.com)