Why Should You Build Credit Score if You are New to Credit?

Your credit report and credit score are one of the most important things that lenders consider whenever you apply for a new loan or credit card. It helps them gauge your creditworthiness and the risk involved in lending money to you on the basis of how you have handled credit in the past.

Having low or no credit history may make it difficult for lenders to make lending decisions and thus, reduce your chances of securing many good loan or credit card options when the need arises. Read on to learn all about the importance of building your credit score and a few key ways to build a healthy credit profile and a good credit score:

What is Credit Score?

Credit score is a three-digit numeric summary of your credit history that ranges between 300 to 900. Key factors that affect credit score include your payment history, length of your credit history, amounts owed, new credit enquiries and the types of credit that you have availed. It helps lenders gauge your creditworthiness or how likely you are to pay your debts in full and on time based on your past credit behaviour. A higher credit score indicates a lower risk for the lender, whereas a lower score indicates a higher risk.

Why is Building Credit Profile Important?

When you are new-to-credit, you might wonder why you should bother with your credit score at all. However, it implies that you have no credit history and would only be eligible for some limited entry-level credit cards and small ticket loans when the need arises. Therefore, having a good credit score is essential for various reasons – both immediate and long-term.

The following are a few key reasons why you should prioritize building your credit score even if you are new to credit:

●    Easier Access to Credit:

When you are new-to-credit, you may only be eligible for some entry-level credit cards and small ticket-size loans. However, as you start working towards building your credit score, a good credit history can open up the opportunity for better credit opportunities in future. A good credit score can help you qualify for different types of credit including personal loan, home loans, credit cards, car loans, etc. which may in turn help you in better management of your finances as your needs change with time.

Additionally, some lenders may also offer you various perks and better credit limits as you prove your creditworthiness and ability to handle credit responsibly.

●    Access to Better Financial Products:

One of the most important benefits of having a good credit score is that you may get to access a wide variety of financial products and usually on more favourable terms. Borrowers with higher credit scores are usually offered relatively lower interest rates and more attractive loan terms by banks and other financial institutions.

In case you plan to make a large purchase in future, such as buying a home or a car, your credit score usually plays a major role in determining the amount of money that you will have to pay as interest. A good credit score can help you save money on interest payments over the term of the loan, whereas a low credit score might cost you a lot more due to higher interest rates.

●    Better Job Opportunities:

Your credit score may also affect other things apart from your ability to be eligible for new financial products. For instance, some employers in industries where financial responsibility is key, such as banking, accounting and insurance, etc. may check your credit report for potential red flags such as defaults and delinquencies, before making a job offer to you.

How to Build Credit Score When You Are New to Credit

Now that we know the importance of building a good credit score, let us also find out how you can start building your credit score. If you are new-to-credit, here are a few key ways that can help you build up a good credit score:

●    Apply for a Secured Credit Card:

Applying for a secured credit card is one of the easiest ways to start building your credit history. It can usually be availed by using a fixed deposit as collateral that also often becomes your credit limit. By using this secured credit card responsibly- keeping your balances low and making timely payments, you can start building a positive credit history.

●    Apply for a Consumer Durable Loan:

You can also apply for a consumer durable loan to purchase consumer durables such as home appliances, furniture, other electronic products, etc. These consumer durable loans are usually easier to avail for “new-to-credit” customers as compared to other lending products such as personal loans, home loans, etc. and can in building up the credit history of customers who are new to the borrowing market as the repayments are reported to credit by lenders.

●    Opt for Buy Now Pay Later (BNPL) Option:

Several BNPL options can also prove to be helpful in building credit health by using them for low-price products. The BNPL option can be used to make various retail transactions whereby customers can make immediate purchases and pay later. It lets you purchase goods and services without paying any one-time or upfront fees and lets you repay equated monthly instalments over a specified period which helps in building credit score.

●    Apply for a New Credit Card with a Bank you have an Existing Relationship With:

When applying for a credit card, try and apply with a bank or financial institution you have a good existing relationship with such as a savings or a salary account. It lets you avail credit more easily as the lending bank already has access to your financial history which can then help you build up a good credit history.

●    Make Timely Bill Payments and Use Credit Sensibly:

Ensure that you pay your loan EMIs and credit card bills on time as it indicates responsible credit behaviour and a clean repayment track record which can help build up a good credit score.

Moreover, avoid applying for credit frequently and use credit sensibly. Apply for additional credit only when you need it and can pay back. Avoid applying for credit cards that you are not eligible for as hard inquiries as well as credit rejections have a negative impact on your credit score.

●    Keep Your Credit Utilisation Low:

Credit utilization ratio refers to the amount of credit availed out of your total available credit limit. A high credit utilization ratio indicates a higher dependence on credit, higher burden of debt and an inability to manage your finances efficiently which in turn may hurt your credit score.

●    Keep an Eye on your Credit Report:

Regularly monitoring your credit report can help you spot errors or inaccuracies on time and get them rectified at the earliest as any wrong information on your credit report can negatively impact your credit score.

Building a credit score is a gradual process and it is essential to start as early as possible. Whether you are new-to-credit because you are just starting out with your career, rebuilding your financial life or trying to establish a solid foundation for your future goals, your credit history and credit score will play a crucial role in shaping your financial future. By starting early and starting small such as opting for a secured card, making timely payments of debts, etc. you can build a healthy credit profile which will in turn offer more financial opportunities and greater financial security at better terms.