Credit score – Build it or suffer

A few decades back a person’s identity used to be his name (caste and religion), hometown and if you are so inclined birth date (sun sign). Based on this basic information the person you interact with would form a first opinion and the relationship would evolve from that point. In the digital age, thankfully financial institutes have no consideration for any of these data points. For financial institutes; one datapoint rules supreme – an individual’s financial behavior – and that is ascertained by their credit score. The score represents one’s creditworthiness and is the most important factor banks review when considering an application for a loan or a credit card.

A person with a low credit score would be declined a loan. Furthermore, learning from their international counterparts Indian banks are increasingly offering differential interest rates depending on an individual’s credit score. This means that if one has never availed a credit product (such as credit card or any loan) in their life the financial institutes look at them unfavorably since no credit score is found.

People who aren’t aware or are ignorant about the importance of credit scores do not realise that while they may not need a loan right now, a situation may arise when they would need a loan to achieve some of life’s most important milestones – automobile, property, marriage etc.

Some of the adverse effects of not having a credit score/history are –

Difficulty in availing best loan offers

If your credit score is zero, it means you do not have a credit history. With no credit history, banks have no data to assess your repayment behaviour and you will be profiled as a ‘risky’ prospect. This will make access to any kind of credit extremely tough and costly. Though you may be able to find lenders willing to lend to you, these loans will come with higher interest and processing costs and more stringent terms and conditions.

Interest rates will be higher

Following the general trend in advanced economies, Indian lenders are also on their way to factor in credit scores for setting interest rates. If this trend becomes a norm in future, absence of credit history will deprive you from lower interest rates.

No pre-approved loan and credit card offers

Many banks offer pre-approved loans and credit cards offers on the basis of your credit score. These offers are usually customised and have a much lower processing time than conventional loans. The absence of credit history will deprive you from availing such offers.

Approval of premium credit cards will be difficult

Credit cards have become an important financial tool today. Apart from providing you easy credit, they also come with attractive reward points program, discounts/cashback offers and EMI offers on credit card purchases. As credit card issuers use your credit score to evaluate your credit card application, a zero credit score means these premium credit cards will not be available for you.

How to build a good credit history

So now that we have impressed the negative aspects of having no or a low credit score; let us give you another bit of bad news. It takes at least 18 months of sustained credit usage for an individual to build a credit history. So our suggestion would be to wait no more!

The best way to build a good credit score for those who do not need any kind of loan is to get a credit card. With a zero credit score, the best option to apply for a credit card is from the bank where you have your savings/salary account.

If you fail to avail regular credit cards due to lack of credit history or other reasons, opt for a secured credit card. These cards are similar to regular credit cards but are typically prepaid in nature. These would allow you to log a few transactions and possibly create a case for your bank to offer you a credit card in the near term.

Housewives, students and other dependants without regular income can opt for supplementary credit cards as they will not qualify for credit cards on their own. Usually, supplementary credit cards have the same benefits and features as the primary cards.

Once you do form a credit score it is critical to maintain it at good levels more on that in a future post do stay tuned.

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