Credit score plays a significant role in credit card and loan approval processes. They are being increasingly used by banks and NBFCs to fix loan rates too. Hence, a good credit score has become an important financial asset today. However, credit score cannot be built without availing credit facility such as loans and cards. Availing small loans to build credit history is not advisable as that would involve interest cost. Hence, the most cost-effective way to build credit history is to avail a credit card.

Why credit cards?

Using credit card for making payments is equivalent to taking loans. Whenever you use credit card for making payment, the card issuer pays on your behalf and you repay it back when you make the credit card bill payment. Your credit card transactions are reported to credit bureaus who include them in your credit report and use it for calculating your credit score.

Unlike loans, credit cards do incur interest cost if their bills are repaid by the due date. Although credit card issuers may charge joining and renewal fees, these too can be offset on managing your credit card transactions according to the interest free period, reward point structures, cashbacks, discounts, annual fee waiver, etc.

As many credit card issuers offer credit cards to those without credit history, start your credit journey by applying for a credit card with your existing banker. Additionally, visit online lending marketplaces to find other credit card options based on their eligibility parameters. Opt for the one that matches your transaction pattern the most.

Opt for a secured credit card if you fail to avail a regular one

If you fail to get a regular credit card due to insufficient income or residence in an unserviceable location, then opt for a secured credit card to build your credit history. These cards are issued against your fixed deposits (FD) and their credit limit is usually capped at 90% of the FD amount. Being lien marked, you cannot close these FDs until you surrender your credit card. If you default on repaying the credit card bills, the issuing bank can liquidate your FDs to recover the dues. These make secured credit cards a risk-free product for banks and hence, they do not consider usual eligibility conditions like credit score, income and employment profile.

Other than the feature of using FDs as collaterals, secured credit cards are similar to regular credit cards. Like regular credit cards, secured credit card transactions are reported to the credit bureaus and used for calculating your credit score. Other credit card benefits like interest free period, fuel surcharge waiver, cash back offers, reward points, dining discounts, free movie tickets, EMI conversion, etc. are also available in secured credit cards. Additionally, secured credit cards allow the cash withdrawal limit of up to 100% of the FD amount.

Once you receive your credit card, regular or otherwise, follow these tips to build your credit score:

# Ensure bill payment by the due date – Lenders prefer to lend to those who consistently meet their credit repayment commitments by the due date. Bureaus too are widely believed to give maximum weightage to debt repayment history while calculating credit scores. Any delay or default in credit card bill repayment is highlighted in the credit report and credit scores are reduced accordingly. Moreover, loan and credit card bill repayments continue to show in credit report for three years or more, which may hurt your loan eligibility for a considerable period of time. On the other hand, a disciplined behavior in bill repayment will reflect positively in your credit report and steadily build your credit score too.

# Contain your credit utilization ratio within 30-40% – This ratio is the proportion of credit card limit availed by you. For instance, if your total credit limit is Rs 80,000 and the total credit card transactions amount is Rs16000, then your credit utilization ratio will be 20%. As lenders prefer to lend to borrowers with credit utilization ratio of up to 30-40%, credit bureaus may reduce your score on breaching this level. In order to avoid this, you can ask your card issuer to increase your credit limit or avail an additional credit card if you frequently breach this limit.

# Avoid direct loan and credit card enquires with lenders – Credit enquiries initiated by lenders on receiving your credit application are referred to as ‘hard enquiries’. Each hard enquiry is included in your credit report and your credit score is reduced by a few points. Instead, visit online lending and card marketplaces to compare various credit card and loan options. Although these marketplaces also fetch your credit report from various bureaus, such requests are considered soft enquiries and they do not lower your credit score.

(By Radhika Binani, Chief Products Officer, Paisabazaar.com)