In today’s credit evolving economy, having a piece of plastic in one’s pocket is the only way to build a reliable credit character. A credit card has become an essential instrument to prove one’s creditworthiness for a loan, mortgage or insurance.
Credit bureaus (like Experian, Equifax, Credit Information Bureau India Limited) apply a complex mathematical algorithm to one’s credit card borrowing and payment patterns to ascertain one’s credit score. The score simply acts as a mathematical prediction of one’s capability to pay one’s debts. The lower the credit score, the riskier the lender feels it is to lend an individual credit, and the higher interest rate it tends to charge if it is opting to approve a credit request at all.
Eligibility for credit card
The eligibility for a credit card differs from provider to provider. However, the basic criteria are as follows:
- At least 18 years of age
- A regular source of income to repay one’s credit card bills (whether salaried or self-employed)
- A good credit history
Reasons why a good credit history is essential for getting a credit card?
In a developing economy like India, credit awareness has a long path to tread. In fact, building a healthy financial well-being requires consistent hard-work. There are a number of entities that use one’s credit history to make assumptions about one’s position to avail of credit. For example, banks, insurance companies, landlords and potential employers may all look into one’s credit score before making an informed decision about one’s credit character. A poor credit score could lead to one being denied an apartment/flat, being charged higher insurance premiums, or not getting hired for a particular job.
The credit score helps banks assess the credit card applicant’s diligence towards paying future credit card bills. It also gathers knowledge of the loanee’s credibility by viewing payment patterns towards already held loans and other lines of credit. Moreover, banks use the score to check the number of loan and credit card applications made by the loanee.
Quite often, banks reject a credit card application because of a poor credit history. As a point of fact, having no credit history is also interpreted as a poor credit history. Establishing a strong credit history can be compared to the dilemma of who came first- the chicken or the egg? Banks and financial institutions give credit to people with a strong credit history. However, if no one gives a person credit, how can a reliable credit record be established?
To start building on one’s credit record, one needs to spend regularly since score generation doesn’t start till one does this.
Banks generally accept a credit score above 700 to issue a credit card to the applicant. However, there are instances when despite a good credit score, one’s credit card application gets rejected.
When a good credit score is not enough
Banks keep changing the approval criteria for their cards. Some common reasons why one may be denied a credit card even after displaying good credit behavior are:
- Too much debt (even if one pays them off on a regular basis)
- Too much available credit
- Short credit history
- Recent delayed payments, charge-offs or other negative items
What do people with poor credit histories do?
At times, one is thrown into inconsistent payment patterns due to genuine reasons like unemployment or medical emergencies, leading to delay or default on payments. In such a case, one needs to take special steps to get approved for a credit card. In an effort to begin rebuilding one’s credit, banks offer secured credit cards. Secured credit cards are offered against a fixed deposit. At the time of delay in payments, dues are redeemed from the credit card holder’s fixed deposit. However, timely payments over a period of time can heal faulty credit histories.