Arohi Sharma, is a 23-year-old who has just begun her first job in a well-known BPO in Mumbai. With a decent salary and no responsibilities, she has tasted freedom like no other and is beaming with self-confidence. She already owns a credit card and within 8 months of usage is dangerously close to falling into a debt trap with over 55% credit utilisation (amount of credit you use as against the total credit made available to you). She never misses out on an apparel sale online or offline and believes in living life king size, partying, lounging, pub hopping it all!
Arohi like most of her friends and millennial at large believes that things are under control and she can pay off her debts in no time, with her next raise or a performance bonus that will come her way. What Arohi doesn't know that it is cliff-hanger situation, where her pile of debt may get unmanageable soon and will result in a low CIBIL score? A credit score of an individual is a measure of her financial health and is widely referred to by lenders during credit assessment.
A low CIBIL score can thus have disastrous consequences and prevent you from accessing timely credit. Arohi's is classic case of "fake it, till you make it", but being in denial of your finances is the worst thing you can do for your financial health. The prudent thing to do is to be honest with your finances and build a good CIBIL score. Here's how to go about it.
This is the first and foremost rule of credit usage. While credit is easily available today, you must know how to use it responsibly. Firstly, never bite off more than you can chew. In other words, do not use your credit card for anything that you do not think you can repay within the ensuing billing cycle. Further, if you are planning to make a big purchase on your credit card, make sure your previous dues have been cleared.
If you think have already exceeded your means by now, but you can still repay your dues without making large alterations to finances, do so right away. This should be done even if it means missing out on a few things you do for leisure. Ideally, your credit utilisation should not exceed 30% to maintain a good credit score.
The temptation to have the latest gadget, some dazzling jewellery or the latest designer outfit can indeed be overpowering. If you think you will not be "cool enough" if you do not indulge in these fancy things that are beyond your means currently, it is time to take a step back. While owing these expensive things may boost your ego and get you a few envious looks from friends or foes, do bear in mind that it is only momentary till the next trend catches on and your material possession becomes redundant. This is not worth jeopardising your financial future over. Worse still, purchasing these things on your credit card without making timely repayments will get in into deep trouble later. Not to mention, it will be damaging to your CIBIL score. A bad credit may become a bane when you are in real need of credit.
If you think you are too young for things like a financial plan, when you have just begun your life, you could not be further away from the truth. If you are old enough to make a living for yourself, it is time to begin with a financial plan. A financial plan will help you set a goal and build assets for a secure future. Once you have chalked out a financial plan with the help of a professional, begin your savings. The first thing to think about is insurance.
Once you are adequately covered as per your age and life goals, you can move on to your next investment goal. When you are young and have long term financial goals it is best to rely on equities to get inflation adjusted returns. Do not fret if you are not familiar with equities. You can always opt for the mutual fund route and save little sums of money each month through a SIP (systematic investment plan).
Once you have begun with your financial plan, it is time to look at your credit health. As mentioned earlier, do not bite off more than you can chew and opt for credit only when it is necessary. Having a credit card is good to build and maintain a good cibil rating, but only when you use it judiciously. Prudent credit card usage will lead you to a good credit score and help you access credit whenever you need it.
To conclude, it is fair to say that while faking about your finances may give you temporary pleasure, but you are in reality digging a ditch for yourself! If you are living beyond your means you are in fact robbing yourself of the mental peace that comes from knowing that you have a firm control over your finances. So if you are indeed faking your finances, now is a good time to retrospect!