Primer. The beginner’s guide to credit

Whether it is a TV, mobile phone, vehicle or a house, almost everything we buy is on credit, or with the use of a credit card.

Data from CIBIL indicates that people under the age of 20 display very little credit activity.

Credit activity grows threefold (in terms of credit accounts held) for people up to the age of 25 and peaks for consumers under the age of 40.

In addition, the data shows that as consumers become credit-active, the typical credit journey begins with two-wheeler loans, credit cards and consumer loans to purchase mobile phones and other electronics items.

This kind of credit activity increases up to the age of 30 after which home loan activity goes up significantly.

Thus, it becomes imperative to manage your credit. This means understanding the key factors that lenders consider while sanctioning credit.

Your income and credit score and report are the two most important factors affecting a lender’s decision about your loan application.

As soon as you take any form of credit, a credit information company creates your credit report from which your credit score is derived.

This score, and report from various agencies, including CIBIL, are used by lenders to evaluate and approve loan applications. A score of 750 or more is generally considered a good score by most lenders. A good credit score can mean obtaining better terms on future loans.

Do’s and don’ts

So, it is important to be prudent in your 20s. This basically means that you mustn’t take on more credit than what you are able to comfortably service.

Don’t over-leverage to the extent that you can’t meet your monthly payments on mobile phones, TVs and the like.

Don’t rotate balances on high-interest credit cards that are likely to move up your credit exposure and increase the possibility of your not being able to manage minimum payments.

Lastly, it is critical not to miss repayments on your loans or credit cards. Missed payments have the largest impact on your credit score and, in turn, will likely be the reason that you will find it difficult to obtain a loan when it really matters, such as when you’re searching for your dream home.

Not only will a high score help you secure loans more easily, but recently home loan providers have also linked lower interest rates to higher scores — so it will save you money! Keep in mind that your credit score is available free — annually — from the credit information companies’ websites, including cibil.com. Monitor your credit score and report regularly in order to ensure that your score is above 750 and that there are no errors in your report.

The writer is Vice President & Head - Direct to Consumer Interactive at TransUnion CIBIL

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