Getting your first salary is just the beginning. Over time you would need to build your credit score so that you can get finance to build your house, plan an international vacation, renovate your old home, or tie the knot with your life partner.
As you start earning, you will find how crucial financial planning is for your creditworthiness. While you are in your 20s, it’s best to start early and reap the benefits. Whether you want to apply for a loan or a credit card in the future, your lender will check your credit score to decide if you are worthy of credit or not. Find out how a beginner can start building a credit score from scratch, which can help in getting the best terms in the future.
1. Understand the Fundamentals
As you are a beginner, you must understand a few important things first. Focusing on the terminology, these are some crucial terms you must be aware of:
- Credit: Money that a financial institution lends to you in the form of a loan or a credit card
- Creditor: The financial institution or loan lender who lends you the money
- Credit Report: A report that contains information about your credit accounts, payment history, credit balances, and other critical information
- Credit Score: A 3-digit number ranging from 300 to 900, based on your credit history and repayment habits
2. Apply for a Secured Credit Card
A secured credit card is an excellent way to try building credit as a beginner. It is just like a normal credit card, but you need to deposit some amount to get it approved. It is easy to receive, it has a low credit limit, and you won’t be able to spend more than the amount you saved as security deposit. So, if you are trying to build your credit slowly, this card will help in understanding how credit works while staying within your available limits.
3. Pay Your Full Credit Balance Every Month
While you are entering the financial world, it’s important to develop the habit of paying your full credit balance every month. By developing this habit, you will get ahead of several long-time users of credit. Keep your card swipes under the limit and keep the credit balance small so that you can easily pay it within your salary. Carrying a balance from one month to the other will only attract interest charges and it becomes extremely difficult to pay off later.
4. Maintain a Low Credit Utilization Ratio
When you apply for a credit card or loan, you get a credit limit up to which you can spend. However, using all of the available credit won’t help your credit score in any way. Remember, the more credit you use, the more difficult it will become for you to pay it in full. The percentage of available credit you use also affects your credit score. The more credit you use, the slower your credit score will improve. So, try to use only 30% of your available credit limit and pay it in full to build your credit score.
5. Keep Your Old Accounts Open Unless You are Paying for Them
The duration of your credit history is another important factor that affects your credit score. That’s why experts advise keeping your old accounts open. If you opened an account during your school or college days, keep it open even if you are no longer using it. That account will benefit you by lengthening your credit history and increasing your available credit limit.
Tips to Maintain a High Credit Score
Once you have achieved a good credit score of 725 or above, maintaining it also becomes vital. Factors affecting your credit score include your payment history, duration of your credit history, other loans and credit cards you have, and any credits you have applied for recently. Follow these tips to maintain a high credit score once achieved:
- Diversify your credit profile with varied loans and credit cards
- Never miss your credit card bills or loan EMI repayments
- Keep your credit utilization ratio down
- Pay attention to your spending habits and save money
Your credit takes around 2-6 months to start building from scratch. While your credit history starts with a credit score of 300, you can use the above tips to improve it slowly and reach the threshold of 725 and above.
Started building your credit history? Check your credit score and keep tabs on your improvement. If you need a home loan, small business loan, or personal loan, trust Clix Capital for the best of terms.
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