Creating a healthy credit history is part of strong financial planning. So one’s endeavour should be to always build a strong credit history so that need-based loans can be easily obtained

Credit history is generally defined as the record of a borrower’s payment behavior that shows his or her ability to repay a loan. The significance of credit history lies in the fact that it acts an important parameter for sanctioning of loans by banks and financial institutions. A health credit history is in fact an intangible asset created by an individual which remains a life-long companion. In an era when credit bureaus are growing and influencing credit decisions of banks and financial institutions, it is important to maintain a healthy credit history. Even if we ignore the need for a good credit history exclusively for the purpose of borrowing, building a good credit history still remains important as credit behavior shows our approach towards managing our expenses and building strong financial base.
 

While building healthy credit history is important, equally important is to know how to build a healthy credit history. The following steps are extremely important in building healthy credit history which we must follow.
 

Cut your cloth according to your coat

This old saying can act as a panacea for overcoming any issue in credit history. The saying gives a very important message which is one should never borrow more than the ability to pay back the loan. People generally get tempted by offers which are given by banks and financial institutions in form of combo offers that are generally given at the time of borrowing of money.  In some cases people even manage to borrow beyond 50% of earning capacity by taking personal loans and loans on credit cards.
 

Though there is no general rule for what can be the maximum borrowing that an individual should do, one should try to make attempts in order to ensure that after paying EMIs (equated monthly instalments) sufficient funds are left to meet monthly expenses and also generate some amount of savings every month. The moment you stretch your borrowing limits to a unmanageable limit any adverse scenario can create a black spot in the credit history which is popularly called as ‘delinquency’ and is known as delayed payment in layman’s language. Logically speaking your borrowing limit should not exceed more than 40% of your net income.
 

Read about “Credit Crossroads: The importance of maintaining a good credit score”, a seminar conducted by Moneylife Foundation
 

Have limited credit cards and ensure prudent usage of credit cards

Credit cards are a type of unsecured credit facility. These cards act as a very important reflection of our approach towards credit. It has been observed that credit cards often prompt individuals to spend more than what is desired. Having multiple credit cards is even more risky. You may end up spending on cards and rotate credit of one card to another. If credit cards are not used wisely, there is a risk of falling into debt trap. Also remember that once you have used your card, avoid any kind of delayed payment. Such behaviours are these days tracked by credit bureau and your ability to borrow may get reduced because of defaults in the credit card. Important things to remember with respect to credit cards are—optimize usage of cards, ensure that unused cards are cancelled and also ensure that any kinds of delay on credit card payments are avoided.

Credit history of your spouse can impact you too. Click here to learn more.

Check your credit history

It is suggested that every individual should check his/her credit history by obtaining credit reports from credit bureaus. The reports from credit bureau carry details of your credit history. Though the reports come at a cost, it makes sense to go for these reports. If anything adverse is found in the credit history, you should try to resolve the issue found in the credit history rather than ignoring such discrepancies. Also checking your own credit record helps you to avoid any last minute surprises which can come your way when you go and borrow money from a bank.

Never borrow for consumption, borrow only for asset creation

The golden rule for any borrowing is that borrowing should only be done for asset creation and not for personal consumption unless you have substantial disposable income. This is also a lesson to avoid impulsive buying. These days people often carried away by demonstration effect and end up spending more than what is desired. Many times such expenses are made on a credit card, which should be avoided at all stages. This will help create as healthy credit history as you will not have any undesirable credit transaction happening in your credit record.
 

Creating a healthy credit history is part of strong financial planning. So one’s endeavour should be to always build a strong credit history so that need-based loans can be easily obtained.
 

Read many other articles related to credit history and credit score, here.
 

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)