Typically, people start their careers immediately after graduating. And in most cases, they decide to go in for a credit card. It’s good to apply for a credit card at the beginning of your professional career, as it allows you to start your credit journey early and build a strong credit score over a period. But credit bureaus do not have a credit history or a credit score to evaluate the profiles of people starting jobs, which poses a unique problem, leading to some banks not providing a credit card—a loan—you apply.
The bank issuing a credit card or processing a loan application relies heavily on a credit report, and your credit score, while making a decision on whether to provide the service. “A credit score is a numerical representation of an individual’s creditworthiness based on the analysis of their credit profile, history and repayment behaviour,” says Saikrishnan Srinivasan, MD, Experian Credit Information Company of India. The credit score is a three-digit number that ranges from 300 to 900, 300 being the lowest and 900 the highest.
Here are some of the ways to get your first credit card and start building your credit history.
Also read: Moneycontrol's credit score check: Get easy, quick access to your credit score
Apply to a bank having your salary account
One of the best ways to obtain a credit card for the first-time millennial borrower is to apply at the bank where you have opened your salary account.
“If it is a salary account, then the bank typically has been working with the company (where the potential cardholder works) for several years. So the bank has an understanding of the income range for a particular designation to evaluate the profile of the credit card applicant,” says Parijat Garg, a personal finance expert.
Based on the corporate relationship, the bank concerned can arrive at a decision on whether to offer a credit card or not.
There is another advantage while applying for a credit card from a bank having your salary account. “The bank maintains a comprehensive record of your income and spending transactions. This enables them to assess your financial stability and repayment capacity with greater accuracy, thereby significantly increasing your likelihood of credit approval,” says Srinivasan.
“The bank will offer a basic to mid-level credit card depending on the applicant’s assessment,” says Garg.
Also read: Want low home loan interest rates? A good credit score helps
Opt for a secured credit card
People who do not qualify for a credit card from the lender they have their salary account with can choose to start their journey with a secured card. Usually offered against a fixed deposit (FD), such secured credit cards come with basic features like reward points or cashback and lenient approval requirements. “These deposit (the FDs) acts as collateral and minimise the risk for the card issuer,” says Srinivasan.
As is evident, you would have to first open an FD with the bank. Then a predefined percentage of your deposit gets decided as the credit limit. For instance, you may deposit Rs 50,000 and will get 80 percent as credit limit, i.e., Rs 40,000, on the card.
“Transactions using a secured card are reported to the credit bureaus, just like unsecured cards, making it a powerful tool for building and improving credit,” says Radhika Binani, chief product officer, Paisabazaar.
By using this secured card responsibly and making timely repayments, you can build a positive credit history. It is crucial to select a secured credit card with reasonable terms and fees.
Breaking it down: Shop for consumer electronic products on instalments
Many retailers and service providers offer instalment plans that allow consumers to pay for their purchase of mobile phones or consumer electronics in monthly instalments. “By opting for this method, you can demonstrate your ability to make regular payments and showcase responsible financial behaviour,” says Srinivasan. He adds that it's essential to ensure that the instalment plan is affordable and fits within the budget. Timely repayment of these instalments where this facility is availed of through the retailer partner’s financial institution will contribute positively to the credit history.
“If you miss the monthly instalment, that starts showing up on your credit history. Every such delay will be detrimental to the credit score,” says Garg. If you can afford to pay Rs 3,000 EMI (equated monthly instalment) per month, then decide the purchase accordingly, Garg adds, advising that you don’t end up purchasing a product that requires you to make higher instalments and then struggle to make that payment on a monthly basis. So you must calculate the monthly instalment before purchasing and look at what you can afford to pay (disposable income).
Also read: Got your first job? Now here’s where you should put your money
How to select your first credit card
When choosing your first credit card, it's challenging for millennials to figure out which one to pick. “You should consider the reward rate, cashback offers, annual charges and certain other factors before applying for a credit card,” says Sumanta Mandal, Founder, TechnoFino. He adds that the best credit card for you depends on your spending pattern and the type of benefits you wish to avail.
For instance, if you shop regularly on e-commerce websites, co-branded cards offered on the website of the website in question can be a good option for beginners. These cards offer up to 5 percent cashback every month while shopping on their website or mobile application using the card. Similarly, if you are using your two-wheeler regularly, then a fuel credit card is beneficial as it offers cashback on fuel expenses, surcharge waiver and other benefits.
“You should decide to upgrade the beginner card to a premium card after understanding the rewards being offered on your spending pattern, redemption of rewards, annual charges and other benefits as per your lifestyle,” says Mandal, adding that one should give first preference to the bank you intend to have a credit card from in your wallet since lenders reject the card application if you have acquired credit cards from other banks.
Also read: Six ways to protect your job in the current storm of layoffs
Avoid defaulting on repayments
The way you manage your credit card, especially your repayment behaviour, has a major impact on your credit score. “The default may bring down the credit score by 100 to 300 points, depending on the kind of default it is,” says Garg. He adds that if the credit score is going to be around 600 points after default, then it will be difficult to get a sanction for a loan from the bank in future. Even if you get a sanction from the bank, it will be at a higher interest rate.
“When you pay only the minimum amount due by the due date, you can save yourself from late payment charges as well as days past due (DPD) mark on your credit report,” says Binani. DPD indicates the number of days by which a consumer has missed a credit card payment. She adds that the remaining balance starts attracting finance charges and new transactions become ineligible for the interest-free period, which can quickly create a debt spiral. High outstanding balances will also be difficult to pay off in the long run, which can lead to missed payments or in worse cases, default.
In short, it is advisable to pay off your credit card dues in full before the due date and maintain a good credit score.
Related reading: Got your first job? Here's how you can make tax-saving investments
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