Starting to build your credit score early is a sign of financial prudence. The sooner you begin your credit journey, the easier it will be to build a strong credit profile. This will play a major role when you later set out to achieve bigger life goals like buying your dream home or a luxury car.

To build a strong credit profile, you must have experience in handling credit in the form of a loan or a credit card in a responsible manner. While loans are need-based and carry high interest charges, credit cards can help you build a strong credit profile without incurring any hefty charges.

Even those who have just begun their professional journey can avail an entry-level credit card and give an early start to their credit journey. At the same time, credit cards can help you save on your spends in the form of reward points, cashback, discount or additional benefits.

Since credit score is largely dependent on your bill payments, credit history and credit utilisation ratio (CUR), let us see how credit cards help you in these areas.

Manage responsibly

While calculating your credit score, credit bureaus give the highest weightage to bill payments. When you clear your credit card dues on or before the due date every month, it is recorded in your credit report and shows that you are using your credit in a disciplined manner. Missed or delayed payments are shown in the ‘Days Past Due’ section of your credit report.

For each month where you pay the dues on time, the DPD section will show the number zero indicating that the payment was made timely. With no missed or delayed payments for several consecutive months, your credit score gradually improves.

Timely bill payment not only contributes towards building a strong credit profile but also helps you avoid late payment fees and penalties. It is still a common misconception among cardholders that paying the minimum amount due on your credit card is enough to avoid negative impact on your credit score. While it is true that if you clear the minimum due by the due date, your credit score will not be affected, the remaining balance as well as all new transactions will start attracting interest until you pay the total amount due. Since credit card interest rates are quite high, even a small outstanding amount can quickly escalate to a large debt, which could be difficult to pay off. Hence, you must always pay the total amount due on your credit card to avoid creating a debt spiral.

Start early

A good credit profile is not built overnight but is a result of multiple credit activities over several years. Hence, availing a credit card in the beginning of the career can be quite beneficial in the long run. A longer history is indicative of your financial credibility and withstanding, helping lenders to understand how responsibly you have dealt with credit before. Consumers who are not eligible for an entry-level unsecured credit card can consider applying for a secured credit card issued against a fixed deposit. While these cards might come with basic benefits and comparatively lower value-back potential, using them with discipline will work in your favour.

Another major factor that contributes towards your credit score is the Credit Utilisation Ratio (CUR). CUR shows the amount of credit that you have utilized in comparison to the total credit available with you. If you max out your credit cards regularly and struggle to make on time payments in full, it shows that you are highly dependent on credit and might make it difficult for you to avail credit in future. Thus, the lower the CUR the better it is. For consumers who own a single credit card, maintaining a low CUR could be difficult. In such cases, you can request your bank for a limit increase on your existing card or opt for a new credit card. Increased limit or the credit limit offered on your new card will add to the overall credit limit available with you, which, with responsible usage, will help you lower your CUR.

For example, if your credit limit is ₹2 lakh and you have used ₹1.7 lakh, your CUR would be 85 per cent. If you get a new credit card with a credit limit of ₹2 lakh, your total credit limit will be ₹4 lakh. Now, if your expenses remain the same at ₹1.7 lakh, your overall CUR will reduce to 42.5 per cent, which will positively affect your credit score.

Even though maintaining a low CUR is necessary, it is also important that you keep your credit card active. Many users believe that owning a credit card is enough to build a credit score. However, what is equally important is to keep the card active, make regular usage and on-time payments.

Building a strong credit profile takes time. Once you get a credit card and start using it, you should check your credit score and credit report regularly and track your growth. It will also help you identify any errors in your report and get them rectified at the earliest.

(The writer is Chief Product Officer, Paisabazaar)

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