For a 21-year-old entering the workforce, building a credit history may not seem important when loans or major purchases are still years away. But establishing a responsible credit track record early can make it easier to access credit later, when borrowing for a car, home or other large expenses becomes necessary.
The first step does not necessarily have to involve taking a large loan. Starting with a credit product that can be managed comfortably and demonstrating consistent repayment behaviour can help a young borrower establish a credit profile.
Start small with your first credit product
A secured credit card backed by a fixed deposit can be one option for someone with no credit history. An entry-level unsecured credit card may also be suitable for those who meet the eligibility criteria, said Santosh Agarwal, CEO, Paisabazaar.
The focus should be on using the card responsibly rather than treating the available credit as additional income. A young borrower can use the card for routine expenses and pay the total outstanding amount by the due date every month.
“Regular use for everyday expenses, coupled with timely repayment and controlled credit utilisation, can help build a positive credit profile over time,” Agarwal said.
Don’t borrow just to build a score
A 21-year-old does not necessarily need to take a loan simply to create a credit history. If credit is required for a planned purchase, products such as a consumer durable loan or BNPL facility can also contribute to a credit history when repayments are made on time.
However, these products should be used only when the borrower can comfortably manage the repayments. A short-term personal loan is another option offered by some NBFCs, particularly to salaried borrowers.
The key is not the number of loans or credit products a person has, but whether they can manage them responsibly. Taking unnecessary debt only to create a credit history can instead put pressure on a young borrower’s finances.
What if your first credit application is rejected?
Someone starting their professional life may find it difficult to get an unsecured credit card or personal loan because they have no established credit history. Repeatedly applying to multiple lenders after a rejection is not advisable.
“Instead of applying repeatedly with multiple lenders, individuals should first understand the reason for the rejection and then consider products designed for new-to-credit consumers,” Agarwal said.
A secured credit card against a fixed deposit can be considered by those looking to establish their credit history. Secured borrowing options such as gold loans and loans against property can also help build a credit record, although these should be considered only when there is a genuine borrowing need and the borrower understands the risks involved.
Once a borrower demonstrates responsible repayment behaviour over time, they may become eligible for a wider range of credit products.
Build habits before you need a big loan
For someone starting their first job, the sensible approach is to begin with one suitable credit product and use it for expenses that fit comfortably within their monthly cash flow.
Agarwal recommends avoiding maxing out a credit card, taking unnecessary loans and applying for several credit products at once. Consistent repayments, controlled credit utilisation and limited new credit applications can help establish a stronger credit profile over time.
For a 21-year-old, the objective should therefore be to build a repayment track record, not to borrow more. Good credit habits established early can become useful later when the need for larger loans arises.