You do not like taking credit and avoided any loans and credit cards thus far. You would pay cash or use your debit card/net banking to make payments rather than using a credit card. Its a matter of choice. And a prudent financial habit too. Non-usage of credit cards takes away the possibility of overspending on credit.
However, there will be times when you won’t have a choice. To make a big ticket purchase, say a car or a house, you may have to approach the bank to take a loan. At such times, banks looks at multiple aspects such as your repayment ability, purpose of loan, security offered and your credit score. As discussed in earlier posts, your credit score does play a role in whether you get the loan. Moreover, in the near future, you can expect Credit score to play a much bigger role. The interest rate you pay may well be a function of your CIBIL score. Who knows your future employer may ask you to submit your credit report along with your resume!!!
Coming back to the case, you want to purchase a house on loan. However, you loan application was rejected since you did not have sufficient credit history. The bank may have rejected the application not just because of insufficient credit history. Quite possible your repayment ability was in doubt since you are self-employed and your cash flows are erratic.
What Do You Do?
Not much you can do for now. You can ask the bank to reconsider loan application. Get a loan guarantor or provide additional security. However, you need to look at the bigger issue too. Of course, you need to demonstrate better repayment ability. What about credit score? You may feel that it is not important. But banks feel it is important. And banks decide whether to offer you a loan or not. Your credit score tells them if you are a responsible borrower. This is not to say that you will not get a loan if you do not have sufficient credit history or a poor credit score. However, in marginal cases, a poor credit score (or insufficient credit history) can play spoilsport.
How Do You Create Credit History?
You can take a credit card. Judicious spending over a period of time will help create credit history. However, it is possible that even your credit card application may be rejected for some reason. So, you want to get a credit card but can’t get it. In that case, how do you build credit history and a decent credit score?
Credit Cards against Fixed Deposits
You open a fixed deposit and take a credit card against the fixed deposit. From the bank’s perspective, it has very liquid security with it in the form of fixed deposit. In case, you cannot pay on time, it can liquidate your fixed deposit to settle credit card debt. Therefore, such credit cards do not pose much problem for banks. Banks can issue such credit cards without any income documents. ICICI Bank offers Coral Credit Card against Fixed Deposit. No income documents are required. However, since the bank is relying on your fixed deposit (in case you can’t pay on time), your credit limit will be linked to your size of the fixed deposit. For instance, in the aforementioned ICICI Bank Coral Credit Card, credit limit is 85% of the amount of the fixed deposit. For instance, if you open a fixed deposit of Rs 1 lac and take a credit card against it, the credit limit for such credit card will be Rs 85,000.
Additional Points on ICICI Bank Coral Credit Card against Fixed Deposit
- Lien is marked on the fixed deposit.
- You must continue the Fixed Deposit so long as your credit card is live. You cannot break the fixed deposit till such time your credit card is active.
- Clearly, fixed deposit has to be in auto-renewal mode.
- Credit Card applicant must be the first holder in the fixed deposit account.
- Minimum fixed deposit amount is Rs 20,000.
- Maximum credit limit is Rs 5 lacs.
- If you don’t pay dues for 60 days from the due date or if the outstanding balance of such card exceeds 95% of the fixed deposit amount at any time (due to fees, penal charges etc), the bank can liquidate the fixed deposit to settle the credit card account.
- You can expect the card issuance process to be quite smooth. You need to open a fixed deposit and apply for the credit card (against FD) subsequently.
- Since the bank does not need anything from you, the issuance of credit card can be quite swift.
ICICI Bank is not the only bank that offers such cards. All major banks issue such cards. And such cards from other banks will have broadly similar features.
If you want to improve your credit score but are finding it difficult to get a credit card (to improve your credit score), you can take out a credit card against your fixed deposit and start improving your credit score. Not just that, you can take benefit from various card features such as interest-free credit period, cash backs, reward points, discount etc. However, you must use credit cards judiciously. If you use credit cards irresponsibly and do not pay bills on time, it may even damage your credit score. You will be back to square one.