Life stages and credit products
Let us look at some of the life stages and which credit products can an individual avail of during each life stage. We will also see how the credit score and profile play an important role in availing credit products.
1. Credit card at the start of the career: In the case of some individuals, a credit card is the first credit product that they may avail of. When an individual starts working, they may take a credit card. If the individual is working with a reputable company and earning a decent salary, the bank may approve the credit card without any security. In some cases, the bank may ask the individual to take a secured credit card against the security of a fixed deposit. The credit limit on the secured credit card is usually 75% to 100% of the fixed deposit amount.
At this life stage, as the individual is availing of the first credit product, they will not have any credit history. Thus, a credit card is an excellent way to start building a good credit score and profile. As you use the credit card regularly and pay the entire monthly bill before or by the due date, your credit score will start building gradually. In six months or so, you will have a decent credit score. Once you have a good credit score, you can avail of other credit products, provided you fulfil the other eligibility criteria.
Credit cards provide many benefits, like up to 50 days of interest-free credit, instant discounts or cashbacks, complimentary memberships, reward points, etc. Thus, you can use credit cards to enjoy these benefits along with building your credit score and profile.
2. Home loan: Once an individual settles down in their profession, they may want to purchase their own house. As the property prices are quite high, most individuals have to go for a home loan. While evaluating a home loan application, banks give importance to a good credit score and profile along with income and other eligibility criteria.
Banks consider a credit score of 750 or above good for approving a home loan application, provided the other eligibility criteria are fulfilled. Along with the credit score, the bank checks the credit profile for any loan repayment delays, defaults, settlements, etc. If an individual has a clean repayment track record, the bank will proceed ahead with the next checkpoint in the eligibility checklist.
In some cases, where the loan amount is high, an individual applicant’s income may not be enough to service the home loan EMIs. In such cases, the bank may ask the borrower to get a co-applicant. In a joint home loan application, the bank will evaluate the credit score and profile of both (primary and co-applicant).
So, the credit score and profile play a vital role in a home loan application. Hence, it is important for an applicant(s) to maintain a good credit score and profile.
Personal loan
Some professionals may enrol for skill development courses alongside their jobs. These courses help them upskill and move up in their career. The tuition fees and the exam fees for these professional courses may be on a higher side and require the individual to go for a personal loan.
Due to the unsecured nature of personal loans, their evaluation is more stringent than other loans. The applicant’s credit score and profile, income and some other factors play a vital role in personal loan applications. Hence, it is important for an individual to maintain a good credit score and profile. It will help in the smooth processing of a personal loan application.
Purchasing a car
A car provides convenience for travel to the office and other places. Most car purchases are financed through a car loan. Here again, the credit score and profile play an important role in processing the car loan application.
Other loans
As you progress from one life stage to the other, you may need to take some loans for various purposes. For example, as your children grow up, you may need to take a loan for their higher education and/or marriage. You may need loans to purchase consumer durables, enjoy a family vacation, start a business, do a home renovation, medical or any other emergencies, etc. For all these loans, your credit score and profile will play an important role. Hence, you need to maintain a good credit score and profile at every life stage.
How to maintain a good credit score and profile?
In the earlier section, we discussed the importance of a good credit score and profile for various loans at different life stages. Now let us understand how to maintain a good credit score and profile.
- Always make timely payments: You must always pay your loan EMI and credit card monthly bill before or by the due date. Timely payments have the highest weightage in your credit score calculation. Regular timely payments along with other measures will help you build and maintain a good credit score.
- Maintain a lower credit utilisation ratio: The credit utilisation ratio measures the percentage of credit used from the total available credit limit. A ratio of 30% or lower contributes positively towards improving your credit score.
- Have a good mix of secured and unsecured credit: Secured loans include home loans, vehicle loans, loans against securities, etc. Unsecured loans include personal loans, credit cards, etc. A good mix of secured and unsecured loans contributes positively towards improving your credit score.
- Don’t make too many credit applications: If you make too many credit applications simultaneously or within a short period, banks look at it as credit-hungry behaviour. Banks may reject your credit application, which can impact your credit score adversely. Hence, maintain a decent time gap between credit applications.
- Credit ageing: Do you have an old credit card(s) that you don’t use or rarely use? If that credit card is lifetime-free, you may retain that card instead of closing it. The aging of credit instruments like credit cards and loans has a positive impact on your credit score.
Maintaining a good credit score and profile is important at all life stages
As you move from one life stage to another, you will aim to achieve various goals. Some of these goals may require you to avail of credit products like loans and credit cards. Banks consider a good credit history as one of the important eligibility criteria. Hence, maintaining a good credit score and profile at every life stage is important as it can help in faster processing of credit applications, provided other eligibility criteria are fulfilled.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
