- Date : 01/10/2020
- Read: 6 mins
Lenders cannot adequately assess your creditworthiness – or your ability to repay loans – without a tangible track record such as a history of timely repayment of credit card dues. But there are alternatives to a credit card that can be used to boost your CIBIL score.
If you have been going through a rough patch following a pay cut, taking a loan may be the only way out. There is no shortage of options, what with lenders going out of their way to offer you a range of loans for every conceivable need – from payday loans, top-ups on existing loans, cash advances against credit cards, to the usual personal, home, and car loans. The only requirement: a credit score of 700 or more.
It is not surprising that more Indians have been keeping an eye on their credit scores since the pandemic-induced lockdown began. Data released by loan aggregator, BankBaazar and credit information company, Experian showed a 25% increase in credit report requests in June 2020.
Why credit scores matter
With banks tightening credit risk assessments, having a good credit score has become non-negotiable in the post-corona economy. If you do not have a loan or credit card to your name, you represent as much of a credit risk to banks as someone who’s missed paying their credit card or loan EMIs. This is because lenders cannot adequately assess your creditworthiness – or your ability to repay loans – without having a tangible track record that they can refer to. Let’s look at some of the primary factors that influence your credit score:
- Credit mix: Banks give greater weightage to loan applicants who have a mix of secured and unsecured debt. A secured loan, such as one taken to finance the purchase of a car or property, is collateralised with the financed asset serving as security, limiting the risk exposure of the lender. For this reason, banks offer lower interest rates and longer tenures on secured loans. On the other hand, unsecured loans – credit cards, personal loans – are short-term loans meant for discretionary use and, as such, command higher interest rates with comparatively short repayment periods. From a lender’s perspective, a well-rounded credit report with both secured and unsecured credit is proof of the financial maturity of a loan applicant.
- Credit utilisation ratio: With expenses going through the roof and income stagnating, the temptation to buy on credit can be irresistible. However, doing so sparingly has its advantages when it comes to building your credit score. The amount of credit you use relative to the credit limit assigned to you reassures lenders that you are likely to repay your debt on time and continue to spend within your means in future. A credit utilisation ratio of 30% is what you should aspire for in order to achieve a great credit score.
- Payment history: A single missed EMI can affect your credit score for up to 36 months. It will always show up on your credit report. Paying on time is critical to your financial well-being as lenders consider this the biggest indicator of financial stability. The loan EMI moratorium that expired in August 2020 was the only time in recent history when credit information companies were specifically told not to report deferred payments on loans and credit cards. A positive payment record can increase your chances of getting credit at lower rates of interest, whereas lenders may seek collateral before providing financing if you have a history of missed payments in the past.
- Duration of credit history: If you switch to a new credit card after using one from another lender for years, your credit score could go down. Lenders take a long-term view when assessing your creditworthiness. Closing an old credit card account can lower your credit age and reduce your credit score to an extent.
How can one build credit without a credit card?
A credit card is a great way to build credit history, especially if you are young. Using your card once every six months and paying off the balance is all you need to do. However, many individuals choose to use credit cards only for emergencies. They prefer to rely on debit cards for day-to-day purchases while leveraging personal, car, and home loans to meet their long-term needs. As we saw earlier, this can be a disadvantage in terms of credit mix. However, there are a few workarounds that you can use to build your credit score without getting a credit card. Let us see what they are.
- Continue making payments on time: This is a no-brainer. Regardless of the type of credit, regular payments are essential to build and maintain a credible credit score. Fortunately, netbanking and mobile banking have made it easier than ever for you to keep track of EMI payments and ensure that your bank account is adequately funded. Setting up direct debit can eliminate the possibility of missed payments. A good rule of the thumb to improve your credit score is to pay more than required. For example, you could add an extra 5% to your EMI with every salary increase. This will also reduce your interest burden.
- Get yourself added on someone else’s credit card: To build your credit score, you can enlist the help of a close family member. Being added as an authorised user on their credit card can add extra points to your credit score, provided the primary user on the card has a decent payment history. You do not necessarily have to order a card for yourself or even use it personally. Consider it a standby card.
- Avoid applying for multiple loans or credit cards: Too many credit enquiries from multiple lenders in a short span of time can affect your credit score. It indicates to credit agencies that you may be in financial distress, and this can lead to your credit score being downgraded.
- Check your credit report for possible errors: It is essential to check your credit report at regular intervals. This can help you spot errors and raise a dispute with CIBIL before your creditworthiness is impacted. Common examples include a wrongly spelled name or incomplete PAN number, or even an incorrect loan settlement status. To rectify any errors you detect on file, contact CIBIL as soon as possible and fill a dispute resolution form along with the 9-digit identification number on the report.
- Do not close old credit cards: As we saw earlier, closing old or unused credit card accounts can deprive you of much-needed credit history. This can, in turn, affect how much of a risk lenders perceive you to be. Instead, keep these accounts open even if you do not use them. Think of them as standby cards that you can use in an emergency.
If you don’t have a credit card, lenders may consider your credit profile too one-dimensional. However, by monitoring your credit score, signing up as an authorised user on another person’s credit card account, and making EMI payments consistently, you can definitely build a better credit score over a period of time – without getting a card of your own. Do you love Shopping? Check this piece out to know 5 credit cards tailored for women shoppers.