At MintGenie, we go a step further in making sure all your personal finance related questions are answered. You have a question, we get it answered. In this series, we take up a question related to your money and ask three financial advisors to give their views. You get three detailed views to help you make an informed choice.
Q. I do not want to own a credit card. As a beginner who just graduated and started work, how do I build my credit score? I have no loans or liabilities and live within my means. Do I really need to bother about credit score at this point?
Sridharan Sundaram, Founder of Wealth Ladder Direct, says:
“At the beginning of the career, one doesn’t need to depend on a credit card to build a credit score. Banks tend to look at your banking transactions. So, there should not be a bounced cheque and bank balance should be sound. The bank statement is used to evaluate the credit worthiness of a borrower.”
He further mentions that when someone works in a good organisation, then one can easily get a loan approved. “If you are working in a good company, then getting a loan is not a big deal even without a credit history,” adds Mr Sundaram.
“So, credit card doesn’t play any role for someone who is starting out in his career, especially for the first-time borrower,” he adds.
Mukesh Vijayvergia, Founder of Nishkaera Financial Advisory and Wealth Management, says:
It is important for every individual to have clear understanding about credit score and the importance of maintaining a good credit score from the beginning of their professional career. Initially, you may not have any loans or liability but soon you will be looking for a credit card or a loan to finance your growing needs. As soon as you do that, the credit agencies start tracking your payment history, credit exposure, credit mix etc and calculate your credit score which will be used by lenders when you will apply for a loan or a credit card in future.
Credit score is a measure of your creditworthiness and hence lenders check your credit score to understand your ability to repay the borrowed money. Maintaining a high credit score (between 700 to 900 in India) have many benefits like having better eligibility for loans and credit cards, higher credit card limits, quicker loan approval, pre-approved loans and many others. Therefore, even if you don’t see yourself applying for loans or credit cards in the near future, ensure that you still maintain a good credit score or credit history.
Shyam Sekhar, Founder, ithought Financial Consulting LLP, a SEBI Registered RIA & PMS Firm, says:
Owning a credit card helps you create a credit history. It does not stop you from paying your card bills within the due date. But, it can get you an excellent credit score. A high credit score will help you pay far less interest when you go in for a bike, car or home backed by loans in your later years. While you may be averse to taking loans now, later day needs for big-ticket decisions will arise and you must consider them objectively. To get a loan at favourable rates, you need to show the world your creditworthiness. A credit score is like a financial health indicator. It helps show the world, your financial capacity and behaviour.
Without it, even if you have great financial health, it will be tough to convince others. You can still have a card and use it without creating liabilities. Many of us have done this for decades and got the attendant benefits without letting liabilities hurt us. So take a credit card with a smaller limit. Use it for your monthly expenses. Settle bills before the due date. A credit card also throws in benefits that if used judiciously are very useful. A card can be used responsibly and also helps track your spending accurately. It's up to you to use it to your benefit.
Akshay Sarma, CFO, Capital Float, says:
This is a great question. I don't think you should worry about your credit score but you should always be aware of your credit score. Given that you're a beginner and you're already thinking about this puts you in a great spot.
Now with regards to how do you start. It's very important to start building your credit profile early. Today you have a wide range of options for first-time borrowers. For example, Walnut 369 and Amazon Pay Later are 2 credit products that fall under this category. Both these products give you a small credit facility (anywhere between ₹2,000 – ₹15,000) that you can use to shop across many merchants. Please remember that these are loans and have to be paid regularly every month. As you keep repaying your loans, two things will happen:
a) Your credit score keeps improving.
b) Lenders of these products become more comfortable with you as a borrower and will be happy to increase the credit offered to you.
One thing to remember is that credit is good and when used well will help you manage cashflows effectively. What is to be avoided is overleveraging or borrowing more than you should. Given that you're living within your means I think you're off to a great start. All the best on your journey to build a great credit profile!
Deepali Sen, Founded Partner of Srujan Financial Services LLP, a Mutual Fund Distributor, says:
It’s always good to have a high credit score. You may have no foreseeable need as of now, but life can surprise us with unexpected future needs, so it’s prudent to have a high credit score (above 700). The same helps in getting a lower loan rate while seeking various kinds of loans. It also helps in getting a higher loan amount sanctioned or getting a credit card with a higher credit limit.
The best way to have a higher credit score (especially when you have no credit history and no loan track record) is to regularly review your credit score and keep checking if for any discrepancies/negative scores. If they are there it would be a good idea to have them removed/sorted by interfacing between credit score reporting company and the organisation/service provider which reports your flaws.
Raj Khosla, Founder & Managing Director, MyMoneyMantra, says:
Credit is defined as the ability of an individual to obtain goods or services before effecting payment, based on the trust that payment will be made in the future. A credit score is ascribed to an individual basis repayment history of their credit facilities with financial institutions. Credit products include credit cards, auto loans, home loans, consumer loans, personal loans, etc.
An individual might not need a credit product, however, it is important to generate a credit score as it takes a minimum of 6 months of holding a credit product to build a score with a credit bureau. The most suited product for generating a credit score for an individual who doesn’t require a loan is to take a credit card as a card can be used for making payments. No charges are incurred if the total amount due is paid before the due date. Banks generally offer credit cards to individuals with no credit history only if they have their salary accounts with the bank or maintain a good balance in their savings account. New age BNPL cards also offer cards to millennials with no credit history, but these tend to have low credit limits.
It is important to build and maintain a good credit score as one may require immediate funds for a financial emergency. Furthermore, a good credit score ensures lower rates of interest for borrowers.
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