Author: This article is contributed by Arun Ramamurthy, Director – CreditSudhaar
It’s funny, isn’t it, when we ask for money from established institutions and they require us to prove that we already have enough or the potential to repay them? Unfortunately for us, every lender needs a guarantee. Credit institutions exist to make our lives easier, but without the certainty that they can make business at the same time, they would cease to exist, too. We’d rather have regulated financial institutions and comply with the financial discipline that is required than fall on hard times and loan sharks.
Imagine this. You are all of 18 years old. You walk into a bank and make a credit card application. Surprise! Your application hits a hurdle and is rejected. The response you get is that you don’t have any credit history to show the bank. You have no credit footprint, so the bank is not going to take the risk of giving you a card. Well, that’s not your fault you say. You have not had opportunity to show that you are creditworthy for the exact same reason – you got to start somewhere. This is where a secured credit card comes into play. It is a good opportunity for young people, people of low income and people without any credit history to start building a CIBIL score.
A secured credit card is a product that is available against a fixed deposit (FD) in a bank. Since the minimum limit for a fixed deposit for a secured credit card could be as low as Rs. 20, 000, it is easier to get a card without much fuss. All you need to do is open an FD account and have it as a guarantee when you apply for your card. Rather than aiming for a loan for a low CIBIL score and being either rejected or burdened with an abnormally high interest rate, you’ll be on your way to building a perfect CIBIL score with a secured credit card. The advantages of a secured card are greater. There is no documentation needed if you are a customer of the bank and already have a fixed deposit. Scores of public sector and private sector banks offer this product.
The only condition to availing such a product is that you will not be able to withdraw cash from the FD account. If you run into difficulties and would like to foreclose the account, you credit card, too will be cancelled along with additional charges being levied. Maintenance of a secured credit card is like that of any other loan or credit card. To keep a stable CIBIL score, ensure that you follow some ground rules:
Pay on time
No matter what the loan is – a higher education loan or a home loan or credit card payments – don’t wait till the “due by” date to pay off your EMIs. If you are under the impression that a couple days of delay won’t affect your CIBIL report, you are mistaken. All such data is captured by credit authorities and affects your score.
Keep your credit utilization ratio under control
One of the ways to improve CIBIL score is to ensure that you maintain a steady credit utilization ratio below 30%. Going above the limit in any credit cycle is sure to impact your score negatively. One way to improve the utilization is to get a higher credit limit, allowing you to spend more freely each month. But, since the limit sanctioned is dependent on the FD amount, this may not be a strong possibility. So, the best way is to keep the utilization low.
Keep a zero balance
Avoid the vicious trap of paying only the minimum amount due each credit cycle month. You may rest comfortably in the notion that you have avoided being a defaulter, but such is not the case. The interest on the outstanding will make it more and more difficult to clear off your credit dues and this could potentially lead to a situation where you find yourself in the bank’s loan defaulter list. Plus, this affects your score negatively as well.
A CIBIL score is a critical aspect of any loan sanctioning process. Be in touch with your report and ensure that it stays above the minimum threshold of 700. This will be a certificate of your creditworthiness and make you stand in good stead with financial institutions.