4 smart credit habits every fresher should adopt to build a strong credit score

Are you a fresher who has just started their professional journey? If yes, you must develop good credit habits to build a good credit profile. A good credit score and profile will help you get access to credit instruments that will further help you accomplish some of your dreams. In this article, we will look at some good credit habits that freshers can adopt to build and maintain a good credit score and profile.

Why should you have a good credit score?

Before discussing good credit habits, let us understand why you should have a good credit score. Some benefits of a good credit score and profile include the following.

Access to loans and credit cards: It gives you access to loans and credit cards of your choice, provided you fulfil the eligibility criteria. As you progress in your financial planning journey, you will need access to these credit instruments. You may need a home loan to purchase your dream house. A car loan can help you buy the car you have always aspired for. A personal loan can help you go for that luxury vacation where you can relax, rejuvenate, and return refreshed to your work.

Banks prefer to give loans and credit cards to individuals with a good credit score. Usually, banks consider a credit score of 750 and above a good score to give loans and credit cards. However, it doesn’t mean that people with a credit score of less than 750 will not get loans or credit cards.

Each bank has its own minimum credit score requirement and other eligibility criteria to consider applications for credit instruments. Some financial institutions consider applications from individuals with a credit score starting from as low as 600. Some banks may have specific conditions to consider applications from individuals with a lower credit score. These conditions may include getting a co-applicant, guarantor, collateral, etc.

Loans at lower interest rates: In the earlier section, we saw how a good credit score is required as one of the eligibility criteria for loans. While a base credit score is required for your credit application to be considered, the higher the credit score, the better for you.

A higher credit score can help you get a loan at better terms. For example, some banks give loans at a slightly lower interest rate for individuals with a higher credit score. Some other benefits may include a discount on the loan processing fees, a higher loan amount, a higher loan tenure, etc.

Hence, as a fresher, it is important for you to start building and maintaining a good credit score as soon as you start your professional career. A good credit score will help you get access to loans and credit cards. Also, if you have a higher credit score, some banks may give you additional benefits on loans.

Good credit habits

So, now you understand the benefits of a good credit score and profile. Let us now look at some good credit habits you can adopt to build and maintain a good credit score.

Always pay your dues on time: At the start of their career, most people don’t have a credit score as they have not used any credit instrument, like a loan or a credit card. Some banks give credit cards to freshers based on the corporate tie-up and the salary account. The other option is to start with a secured credit card that banks give against the security of a fixed deposit.

You can start using the credit card for your regular expenses. As you have just started using a credit card, this is a good time to start developing your first credit habit of always paying the dues on time. Make it a habit to pay the entire monthly credit card bill before or by the due date.

Banks allow you to pay only the minimum amount due (MAD) and carry forward the balance to the next billing cycle. But if you carry forward any balance, you will have to pay hefty interest charges. Most banks usually charge a monthly interest rate of 3.00% to 3.50% on the credit card balance carried forward. It translates into an annual interest rate of 36.00% to 42.00%.

The interest charges can add up quickly and put you in a debt trap. Hence, it is important to be disciplined right from the start of your career and make it a habit to pay the entire credit card monthly bill on time.

It is important to note that paying the dues on time has the highest weightage in calculating the credit score. Hence, if you get this one credit habit right from the start of your career, it can provide a big boost in your efforts to build and maintain a good credit score.

Keep your credit utilisation ratio low: At the start of your career, when you get access to a credit card, you will be keen to make the most of it. However, before you go out and start using most or the entire credit limit every month, understand the concept of credit utilisation ratio.

The credit utilisation ratio measures the percentage of the credit limit used from the total credit limit available. For example, suppose the credit limit on your credit card is Rs. 1 lakh, and you use Rs. 75,000 in a month. Your credit utilisation ratio is 75%.

A credit utilisation ratio of 30% or lower contributes positively towards your credit score. A credit utilisation ratio of more than 30% can impact your credit score adversely. Hence, you must aim to keep your credit utilisation ratio at 30% or lower. That will help you build and maintain your credit score.

Every month, check what percentage of your credit limit you have used. With this credit habit, you can monitor the credit utilisation ratio. If the ratio is higher than 30%, you can take steps to lower it. One way to lower the ratio is to ask the bank to increase the credit limit on your credit card and maintain the same monthly expenses.

Have a mix of secured and unsecured loans: Credit Information Companies (CIC) like CRIF High Mark consider your credit mix while calculating your credit score. A balance of secured (home loan, vehicle loan) and unsecured (credit card, personal loan) loans has weightage in the calculation of an individual’s credit score.

At the start of their career, some individuals may rely more on credit cards and personal loans for their credit requirements. It is advisable to maintain a balance (secured and unsecured) in your credit requirements so that it contributes towards building and maintaining your credit score. However, that doesn’t mean you take a secured loan even without the need for it. You should take any loan only when there is a need for it.

Monitor your credit report regularly: At the start of your career, when you are building your credit profile, it is equally important to monitor it regularly. Regular monitoring will help you identify if there are any errors in the credit report. It will also help you identify any fraud, like an entry related to a loan/credit card you have not applied for.

As per RBI guidelines, all CICs must provide individuals free access to one full credit report annually. There are 4 CICs registered with the RBI. So, you can access a free copy of your credit report from one CIC every quarter, which will give you 4 free copies of your credit report in a year. That way, you can monitor your credit report quarterly, free of cost.

There are some financial companies and intermediaries that provide you free access to your credit report. The free access may depend on the type of account you hold with them or some other criteria. Regular monitoring ensures the credit report is free from any errors, inaccuracies, etc.

Good credit habits lay the foundation for a good credit score

As a fresher, you should adopt good credit habits right from the start of your career. Doing so lays the foundation for building and maintaining a good credit score. Later, a good credit score helps you get access to loans and credit cards when needed. A good credit score can also get you better loan terms with some banks, like lower interest rates.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.