5 Smart Ways Millennials Can Build Their Credit Score through Festive Shopping

Each lender, i.e., banks and Non-Banking Financial Companies (NBFCs), follows certain eligibility criteria for the loan application approval process, based on which your loan application gets approved or rejected, and the loan amount you are eligible for is determined. Out of many factors, your credit history and credit score are the most crucial factors determining your loan eligibility.

Credit history is a record of your past loan repayments. The credit bureaus gather data on your past and current loan repayments from banks, NBFCs, credit card companies, government, collection agencies, etc. and prepare a detailed report called a credit report. This report contains your credit history and is based on which a credit score is given to you, i.e., the borrower. The credit score ranges from 300 to 900 and depicts your credit repayment capacity. The higher the credit score and stronger the credit history, the more the banks and NBFCs will be interested in granting you credit facilities. That said, a lower credit score reduces your chances of getting a loan.

If you are in an early phase of your earning years and have never opted for any kind of credit, there is a chance that when you apply for your first loan, the lender may reject your loan due to a lack of credit history and absence of credit score. However, you can overcome it by making a small difference in your purchases and payments of day-to-day expenses. Here are 5 smart ways you can build your credit history and improve your credit score through your festive shopping:

1. Use your credit card for purchases:

Most merchants come up with different credit card offers during festivals. These offers not only allow you to earn reward points and cash back but using the credit facility on credit cards and making timely repayment can also help you improve your credit score. Besides, using an old credit card helps increase the age of your credit, which is another important factor that has a high impact on your credit score. So, if you are planning to make a big purchase like an electronic gadget, furniture, etc., you can consider buying it through a credit card. Making timely repayments of your credit card bills helps boost your credit score. Using your credit card to improve your credit history is the most affordable way, as if you repay the dues on time, you will not have to pay any extra costs, such as interest or processing charges.

2. Use an EMI card/facility:

Making big purchases no more requires you to save for months. Almost all the leading online and offline merchants offer No Cost EMI or Zero Interest EMI facilities to consumers who cannot afford to pay in full. The facility is offered through a tie-up between a merchant and a financial institution. While the No Cost EMI facility saves your interest money, the lenders may charge higher processing fees or other charges. Hence, it is important to thoroughly compare and read the terms and conditions to avoid any future disappointments. In case there is no such offer available with your preferred merchant, you can convert your credit card purchase into EMI. However, availing of the credit card EMI facility without a No Cost EMI offer may attract a high-interest rate.

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3. Take a Personal Loan:

If you have bigger expenses to take off this festive season but lack sufficient savings, you can consider taking a personal loan to meet those expenses. Personal loans are typically available from Rs 30,000 to Rs 5,00,000. Since there is no restriction on the end use of the personal loan amount, you can use this amount for any legitimate purpose, such as buying a vehicle, expensive gadgets, renovating a home, throwing a party, etc. The personal loan interest rates are very high compared to the interest rates of other secured loans like car and home loans. The banks and NBFCs generally offer a discount on interest rates and/or processing fees during festivals like Dussehra and Diwali. If you are considering taking a personal loan, it is advisable to compare different lenders in terms of interest rate, loan amount offered, customer service, eligibility criteria, the application process, processing fee, pre-payment charges, etc., and choose the right lender. Opting for a personal loan and regularly paying it will help in improving your credit score.

4. Maintain Credit Utilisation Ratio:

While many borrowers ignore this factor, a credit utilisation ratio is a crucial factor that determines your credit score. It is a percentage of credit you have utilised against your available credit limit. So, you can calculate your credit utilisation ratio by dividing your entire outstanding debt balance by your total available credit limit. The more you utilise the credit facility by swiping your credit cards and opting for loans; the lower your credit utilisation ratio will be. Therefore, it is advisable to utilise up to 30% of your credit limit. If you are a frequent credit card user and use the EMI facility on your credit card, it makes sense to use multiple credit cards or increase the credit limit on your existing card/s in order to maintain the credit utilisation ratio.

5. Make Timely Repayments:

It is imperative to make timely repayments of your existing and new credit card bills and loan instalments to ensure your credit score maintains or improves over time. Whether you opt for a new credit card or personal loan to build your credit history, you have to make sure that you have a repayment plan so that your monthly repayments do not get delayed or bounced. To make sure you pay your dues before the due date, it is advisable to use the auto-pay facility or debit mandate. If you do not have any plans to make big purchases this festive season and do not want to spend too much, you can still improve your credit score by opting for a lifetime free credit card that comes without any joining and annual fee, using it for your day-to-day expenses, and repaying the due on time.

To conclude:

While having credit cards and loans is essential to improve your credit score and building a strong credit history, you should not apply for multiple credit cards and loans simultaneously. When you apply for a new loan or a credit card, the lender inquires about your credit score with credit bureaus and multiple credit score inquiries in a short period can affect your credit score. Moreover, when lenders reject your applications due to poor credit scores, it can also harm your credit score. Apart from this, it is also important to have the right credit mix of secured and unsecured loans. Having maximum unsecured loans can also negatively impact your score. It does not make sense to avail of multiple loans and borrow more than what you can comfortably repay, as it can lead to financial stress and debt overhang in the future.

A credit score plays a vital role in approving your loan or credit card application. Although the tips given above will help you maintain and/or improve your credit score, you cannot expect it to completely change your credit score overnight. However, if you follow these tips regularly and have patience, you will eventually see a positive result in your credit score.

Warm Regards,
Ketki Jadhav
Content Writer