Hena Mehta, Co-founder and CEO of Basis, India’s financial services destination for women, powered by communities and financial education shares her expertise on the subject.
Ever hear the term ‘credit history’ come up in conversation? Well to give you some context — if you have large financial goals for the future, chances are, you’ll apply for a loan at some point in your adult life. And a key factor that will enable you to get approved for these loans is your credit history.
Let’s examine a couple of pointers to keep in mind:
1. Financing large purchases usually requires a loan
There are two ways to finance a large purchase. Through your savings, or by taking on a loan. Typically for large purchases like a home or a car, taking a loan makes sense given interest rates are affordable, and we typically don’t maintain that much liquidity in our bank accounts.
Taking the example of a home loan, you’ll need to pay a down payment upfront, this is typically around 20% of the total price. And the balance is structured as EMI payments over a specific duration.
- How do you get a loan?
When applying for a loan – yes, there’s some paperwork involved. The lender evaluates your credit-worthiness as a borrower. Basically, they assess how likely you are to default on your upcoming loan payments. The lower the probability, the better your chances are of getting a loan. Especially one with favorable terms. - How does a lender figure out your credit-worthiness?
Your credit-worthiness is determined by your credit-score. What is a credit-score you ask?
a) It’s a number between 300 and 900 that signifies how ‘good’ a borrower you are.
b) The higher the score, the better a borrower you are.
c) Ideally, your score should be 700 and above. 750+ is considered ‘excellent’!Different credit bureaus calculate your score based on their own algos, but broadly speaking, these things matter:
a) How regular you’ve been with repayment of prior loans (if any)
b) How much existing debt you have
c) How long you’ve been a responsible borrower. - How do you build your credit score? Start by getting a credit card – even if it’s a low limit. Gradually work your way up to higher limits, as you build up your score. Duration matters, so start building that score as early as possible. But remember, it’s still never too late.As mentioned above, it also ties in to being a responsible borrower. The best time to get a credit card is as soon as you start receiving an income in your first job.
- Unsecured vs. secured loans To put it as simply as possible, you can get approved for a loan either with collateral – secured loans, or without – unsecured loans.Home loans and car loans are examples of secured loans. Personal loans and credit cards are termed as unsecured loans. For the most part, interest rates are lower on secured loans. This is because they are considered lower risk for the lender, as there is always the backup of collateral in case of default (i.e., if you’re unable to repay your loan).We hope this little checklist helps! Building your credit score starting in your 20s will only help achieve larger financial goals as you foray into adulthood.Of course, there are tons of questions you’ll have during the process. But nothing that can’t be figured out. All we say is Your Money, Your Way!
