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What Does Building Credit Mean?

Within days I had my second credit card of Citibank in my wallet. But what changed in last one year that the same bank who was rejecting my application offered one from their side? The answer is simple, earlier I did not have a credit history. While I was using my first credit card, I was actually building credit history for myself. A good credit history helped me to get my second credit card of my choice.

Good Credit History Helps?

People who make all payments by cash or cheque will not build credit. Such people will find it hard to get loans when need arises. Person with good credit history can get loan very easily. In Europe & America, landlords checks credit history of tenant before allowing the person to take their their home on rent. Person with good credit history is more likely to pay rents on time and will never default. There are people who buy mobile phones, furniture's, laptops through financing. Person who has build good credit history will get financing very easily.

What does building credit mean?

Suppose you asked your close friend to borrow some money to you. Because the friend knows you, borrowing is comparatively easier. There is a certainty that you will return your friends money on time. This happens because your friend knows you. Consider a similar situation where you are requesting a bank to borrow you money. Banks identify people by their creditworthiness. Person with bad credit history will find it very tough to get loan from bank. Person with good credit history will get loan easily. Person with no credit history can be certain that his loan application will be rejected by bank. It is essential for people to keep building credit history. Building credit means building a reputation that one is a reliable borrower. A reliable borrower will not run-away with the money. High creditworthiness means, person will pay all his dues on time. Just by paying all credit bills on time can give one a fantastic credit history.

Why one need to build a good building credit history?

People may need education loan, personal loan, auto loan, home loan etc when need arise. People like me may also like to use credit card for convenience. In order to avail such facilities, bank must be assured about ones creditworthiness. Necessity of good credit becomes more important when one need loan to manage

some emergency. In those moments if loan application gets rejected because one has no/bad credit history, makes matter more difficult. Hence it is always advisable to maintain good credit history. It takes time to build credit. hence its better to start building credit early in life.

Easy way to Build Good Credit History?

One of the easier and cheaper way to build good credit is by start using a credit card. Credit cards are offered free of charge, and they make convenient payments possible. But one must take care that all credit card bills must be paid in full on time. Paying 100% bill amount within credit free period can help building excellent credit history. It is also important not to use credit card a lot. Total usage should not comes close to maximum credit limit. As a rule of thumb, keep credit card usage below 25% of maximum credit limit. Even if one pays off all credit card dues on time, but bringing spending's close to maximum credit limit will very negatively effect the credit score.

Some people think that availing bank loan (like home loan, personal loan etc) is also another good way to build credit history. This is only partially correct as loans do build credit history. But bigger question is is this a good way. According to me this should not be the preferred way. The reason being, loans come at a cost. We have to pay interest on loans. On one side loan charge interest, on other side credit card comes free of charge. If purpose is only building credit, credit card is a much wiser option.

Is it wise to take loan to build credit?

On one side people are brought-up with the concept that ‘avoid loans’. But on other side one with no loan will build no credit history. Building credit is more important or staying out of debt is more important? We must note; ‘staying out of debt’ is more important than ‘building credit’. But a second question that also needs answering is, we will ever need loan in future? A middle class person will most likely need loan to manage capital intensive requirements. Some of these requirements are like buying a car, buying home, education for child etc. One must think intensely and foresee if such loan requirements can be avoided. If answer is negative, better is to start building credit from today.

Category: Credit

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