Credit Score Explained: Why Young Adults Need to Build It Now

Credit Score Explained: Why Young Adults Need to Build It Now

"I don't need a loan, so I don't need a Credit Score." This is a myth.

In the modern financial world, your Credit Score (CIBIL Score in India) is your Financial Reputation. It doesn't just affect loans; it can affect your ability to rent an apartment, get a credit card, or even get a job in finance sectors.

Starting to build it early (at 18-21) gives you a massive advantage when you eventually need a Home Loan at 28.

What is a Credit Score?

It is a 3-digit number ranging from 300 to 900.

• 750+: Excellent. (You get the lowest interest rates).
• 650-750: Good. (You get loans, but maybe at higher rates).
• < 650: Poor. (Loans rejected).
• -1 or 0: No History. (You are a ghost to the banking system).

Why Should You Care?

1. Cheaper Loans: If your score is 800, bank might give you a Home Loan at 8.5%. If it's 680, they charge 9.5%. That 1% difference costs you ₹15 Lakhs extra over 20 years.
2. Premium Credit Cards: Access to cards with free lounge access and high rewards.
3. Emergency Power: In a medical emergency, a high score gets you a Personal Loan instantly. A low score leaves you helpless.

How is it Calculated?

1. Repayment History (35%): Do you pay bills on time? (Most important).
2. Credit Utilization (30%): If your limit is ₹1 Lakh, do you spend ₹90k? (Bad). aim for < 30% usage.
3. Credit History Length (15%): How long have you been using credit? (Older is better).
4. Credit Mix (10%): Do you have a mix of secured (Home/Car) and unsecured (Card) loans?
5. New Enquiries (10%): Do you apply for 10 cards in a month? (Looks desperate).

How to Build Score from "Zero" (for Students)

Since banks won't give you a loan without a score, and you can't get a score without a loan, how do you start?

1. Consumer Durable Loan

Buy a phone or laptop on EMI (Bajaj Finserv/Amazon Pay Later). Ensure you pay every EMI on time. This is the easiest entry point.

2. Secured Credit Card (Fixed Deposit based)

• How: Go to your bank (e.g., IDFC First WOW, OneCard). Open an FD of ₹2,000 or ₹10,000.
• Get Card: They give you a credit card with 90% of FD amount as limit.
• Use: Buy gum/coffee once a month.
• Pay: Pay the bill in full.
• Result: In 6 months, your score generates.

3. Become an Authorized User

(Less common in India, but possible). Ask parents to give you an "Add-on Card" on their credit card. Their good payment history helps you.

Common Mistakes to Avoid

1. Missing a Payment: Even one day late payment is reported to CIBIL. Set Auto-Pay.
2. Closing Old Cards: If you have a "Life Time Free" card you got 5 years ago, don't close it. It adds to your "Length of History." Just keep it in a drawer.
3. Applying Everywhere: Don't click "Apply Now" on every ad. Each rejection lowers your score.

How to Check Your Score?

• Free: GPay, Paytm, Amazon Pay allows checking CIBIL score for free.
• Official: CIBIL website allows 1 free report per year.
• Note: Checking your own score is a "Soft Inquiry" and does NOT hurt your score.

Key Takeaways

1. Start Small: Buy a ₹500 item on EMI and pay it off.
2. 30% Rule: Never use more than 30% of your credit limit.
3. Patience: It takes 6-12 months to build a score of 750+.

Frequently Asked Questions

Does my income affect my score?

No. CIBIL doesn't know your salary. It only knows your debt behavior. A billionaire who doesn't pay bills can have a lower score than a student who pays on time.

Can I fix a bad score?

Yes, but it takes time (12-24 months). Clear dues and start paying on time. There is no "quick fix" agency.

Your financial health matters. Explore more personal finance tips on Sproutern