Arnav Aggarwal recently graduated from a reputed engineering college. He had a brilliant career in front of him and he was all set to make a leap to the real world. As soon as Arnav joined his first job he started getting numerous credit card offers with attractive introductory propositions.
Arnav applied for 3 credit cards. He was overwhelmed with the freedom the cards gave him to spend now and pay later. Arnav immediately used the card to buy a new iPhone, a watch and many more luxury goodies. He continued charging many more expenses and paid only the minimum amount due for 6 months. The low introductory rates climbed steeply in a few months and the debts became so high that he defaulted the following month. Soon his irresponsible habits burdened him with debilitating debt.
Arnav thought that he could still come out of this situation temporarily by taking a personal loan to pay off his credit card bills for now, but it was not to be. His application got rejected because of a bad CIBIL score. He was left with no choice but to look for bad credit personal loan lenders who do not base their approval decisions on the credit score but charge a high interest rate.
From Arnav’s example do we infer that it was a wrong decision to get credit cards? Absolutely not! Using credit cards wisely helps one to build a good credit score which makes it easier to get loans and mortgages later in life. In fact with 3 credit cards in hand Arnav had the opportunity to build a solid foundation for his credit score only if he handled his finances responsibly.
Arnav did not know that as soon as he took his first line of credit the credit bureaus started tracking his financial behaviour. They evaluated his financial performance and assigned him a credit score—a number that would affect all his financial decisions for the rest of his life. Because of his irresponsible credit habits his credit score declined and left him looking for personal loans for low CIBIL score. Though he managed to arrange for funds this time from bad credit lenders, Arnav now needs to mend his habits to ensure that no further damage is done to his score.
Using credit requires a lot of attention. It requires balanced spending, responsible behaviour and good credit habits. Following the below rules can help Arnav improve his score.
Spend within your budget - If you cannot afford an expense today it is highly unlikely that you will afford it at the end of the month. So use your card only if you are sure that you will be able to pay for it when the credit card bill arrives. Living a borrowed lifestyle will only lead you in a debt trap. Resist impulse buying. Let your budget be your guide while you spend.
Pay the balance in full- Credit cards are high interest loans. If the balance is not paid fully each month then the debts soon become unmanageable. By paying only the minimum balance you will end up paying huge amount of interest. It would take a long time to clear the debts. If in any month you are not able to clear the full bill then do not make any additional purchases until you are able to clear the existing outstanding balance.
Timely payments - Payment history accounts for 30% of your credit score. Any delays in payment get recorded on the credit report and affect your credit score negatively. Treat the due dates as a deadline. Set auto debits to ensure that you never fall behind on repayments and get into debt.
Credit limit - The credit score takes into consideration the amount of available credit that you use each month. If you spend close to your credit limit it will drastically bring your credit score down.
If out of ignorance you did not pay attention to the way you are dealing with credit do not despair. There are lenders who give personal loans without a CIBIL check. If you make timely repayment of these loans and have a realistic spending plan then you can correct your past mistakes and avoid any future credit troubles.