In financial emergencies, banks and other financial institutions play the role of the saviour by providing loans. However, many individuals are denied this opportunity due to a lack of credit history. In fact, according to the World Bank data, there are around 190 million unbanked individuals who are left out of mainstream financial services due to lack of credit history, low or no education.
There are multiple ways to improve one’s credit history and the credit score helps in keeping a track of it. However, many individuals check their credit score only when they actually need it. This last-minute attempt may hamper the entire credit experience. Therefore, experts advise checking credit scores at regular intervals to know about any discrepancies.
If you have just started your employment journey, it is probably the best time for you to take steps to build your credit score. This article explains how you can do that.
But first, let us help you understand why a credit score is important when looking for a loan and what leads to a low credit score.
Why is your credit score important when asking for a loan?
A credit score is a three-digit number ranging from 300 to 900, that determines your creditworthiness.
According to Anurag Sinha, Co-founder and CEO of OneScore, a credit score is a significant benchmark considered by lenders when you apply for a loan.
“Higher the credit score, higher is your credibility as a borrower. Your score directly indicates how risky or trustworthy you are as a borrower and hence it is really important to have a high credit score to get easy access to loans at a lower interest rate and/or credit cards with a higher credit limit. Having a healthy credit score becomes even more imperative while applying for collateral-free loans,” Sinha told FE Online.
Also Read | 5 things to keep in mind before closing a credit card
Reasons for a low credit score
The key reasons for a low credit score are:
- Delayed repayments: Even one or two delayed credit card payments can have a negative impact on your credit score. The more the number of delayed payments, the greater the negative impact on your credit history and credit score.
- Missed payments: Sometimes you may not be in a position to make your payments. In such cases, it is important to pay the minimum amount due rather than skip the payment completely. If you miss any of your payments, it will be recorded in your credit history and lead to a drop in your score.
- High number of inquiries: Your credit score can be adversely impacted if you have applied for loans or cards with multiple lenders in the recent past. This leads to multiple inquiries in Bureaus which can impact your score.
- Misreporting: Occasionally, there may be an administrative error that results in wrong information being recorded on your credit report. Sometimes, this might be because of fraudulent activity as well. For no fault of yours, these errors could lead to a lower credit score, signalling to future lenders that you have bad credit. On such occasions, you should approach your bank to get this updated at the earliest.
What should you do to improve your credit score after getting a job?
Sinha said that having a healthy credit score is an important indicator of your creditworthiness. He shared some tips to build a credit score for New to Credit (NTC) customers or youngsters who have just started working:
- Get a secured credit card: Secured credit cards are the ones that are issued against some kind of collateral, generally a fixed deposit with the card-issuing bank or financial institution. These credit cards usually have lower credit limits than secured credit cards, usually 75-80 percent of the collateral amount but they help immensely to start building your credit score.
- Timely repayment: Whether a loan EMI or credit card bill, timely payments are crucial to your credit score. Setting Electronic Clearance Services (ECS) your EMIs’ or credit card repayments can avoid missing the payments. Sometimes, however, due to several reasons, you may not be able to pay your entire bill; in such situations, you should pay at least the minimum amount of dues to avoid the default rather than missing the payment.
- Avoiding unnecessary usage of credit cards: Frequent excess use of credit cards usually over 70 percent of the limit can lower your credit score significantly. This is mainly as having such high credit exposure often send a red flag to lenders indicating you as a high-risk defaulter. Although, using a credit card for all the purchases to earn a discount or cashback is fine, but it is very important to clear the dues in full on time to avoid any interest payments or any negative impact on your credit score.
- Multiple credit requests: Avoid applying for multiple credit products since this gets recorded in the bureaus and you will be classified as a credit hungry customer, which in turn affects your credit score.
ALSO READ | Seeking personal loan from an app? Here’s why your application may be rejected
Can you get a loan without a credit history?
It’s good to have a high credit score to get a loan with a lower interest rate.
Sinha said that in the absence of a high credit score the process isn’t as seamless as lenders would have to assess your creditworthiness via other documents such as bank statements, income proofs etc. This too, is only for secured loans, backed by some collateral.
Types of secured loans:
– Mortgage loan or loan against property
– Car loan
– Home loan
– Business loan against any asset (machineries/raw materials/buildings)
– Loan against fixed deposit
Credit scores are calculated by the credit bureau using their own various algorithms.
OneScore app, uses an AI-based simulator, which analyses user data and curates personalized insights which throw up the reasons for a low score and also what steps need to be taken to improve the credit score over a period of time.