Building your credit history as a young professional
As you start your professional journey and embark on your career path, it’s crucial to understand the importance of establishing a strong credit history. Your credit score plays a key role in shaping your overall financial well-being and opens doors to various opportunities. However, many young professionals face the challenge of having a limited or insufficient credit profile. By taking proactive steps and planning carefully, you can lay the foundation for a financially secure future.
Although building credit may not be your immediate priority, it holds considerable significance. Your credit score, acting as a comprehensive reflection of your responsible borrowing and repayment habits, plays a key role in numerous aspects of your financial life. It serves as a yardstick by which lenders evaluate your credit worthiness. When you apply for various financial products like loans or credit cards, lenders use your credit history to decide on your loan application and finalize the terms and conditions you may be offered. A strong credit history and a good credit score offer several benefits, such as qualifying for credit cards and securing lower interest rates on loans. By saving money on interest payments, you can allocate those funds towards investments that shape your future. Additionally, some employers in certain industries review credit reports during the hiring process, making a solid credit history crucial for job opportunities.
Lenders are increasingly leveraging alternative data sources and advanced analytics to evaluate creditworthiness of such customers to fulfil their borrowing needs. These lenders could be one of the first avenues that can be leveraged to start building your credit profile. To build a strong credit history, cultivate responsible financial habits. Make timely payments not only for your loans and credit card bills but also for other expenses like utilities and rent. This demonstrates financial discipline and establishes your potential for future payments to lenders. Set up reminders or automate payments to ensure you never miss a payment. If you’re new to credit or have limited credit history, assess your spending patterns and make adjustments that positively impact your creditworthiness.
The duration of your credit history significantly affects your credit score. Consider getting a credit card early in your professional journey and prioritise paying off the full outstanding balance by the specified deadline. Responsible use of your credit card and meeting payment obligations will enhance your credit history and establish you as a reliable borrower.
In addition to credit cards, diversify your credit portfolio to strengthen your credit history and score. Effectively managing and responsibly handling various forms of credit demonstrate your ability to handle diverse financial obligations.
Lastly, regularly monitor your credit reports and track your credit closely. This allows you to promptly identify any discrepancies or errors in your reports and take necessary steps to rectify them. It also empowers you to assess details regarding your credit utilisation, payment history, and overall credit management, helping you identify areas for improving your financial health.
While building your credit history, it’s equally important to avoid certain practices. Maintain a low credit utilisation ratio and avoid maxing out your credit card. Applying for credit too frequently can negatively impact your credit score, as it suggests a desire to take on more debt. Therefore, space out your credit applications and only apply when necessary.
Navigating personal finance can be challenging for young professionals starting their careers. Focus on expanding your financial knowledge, learn about budgeting, saving, and effectively managing your finances to make informed decisions. Additionally, prioritize building an emergency fund alongside developing a credit history. This fund acts as a buffer during medical emergencies or unexpected expenses.
Developing a solid credit history requires time, consistency, and responsible financial management. Start by creating a well-structured budget that aligns with your specific needs and aspirations. Avoid common pitfalls like overspending, accumulating excessive debt, and incurring high interest charges. Building and improving your credit score typically takes at least six months, so plan ahead when considering major purchases. Adopting prudent fiscal habits and practices will pave the way for a strong credit profile, unlocking numerous financial opportunities.
Sajish Pillai is Managing Director, Head of Assets and Strategic Alliances- Consumer Banking Group, DBS Bank India
As featured in Mint