Normally I would not advise anyone just starting out at work to get a credit card, simply because those delightful offers and points manipulate you into spending more.

But Covid changed everything!


Even before Covid, Banks had increasingly moved towards digitization and instant disbursal of loans. Customers could get instant offers based on their salary credit and credit score. It looked like there was no longer a need for bank staff to manually check their salary etc. This worked well for people who had years of repayment history and had formal access to bank credit.

When Covid struck, however a lot of people needed cash because they were out of a job or their income sources dried up. Trouble was, they had never taken a loan, and so they didn't have a repayment history nor a CIBIL score. The ones who still had a job could get a loan based on their salary slip but small business owners/freelancers couldn't get one.

Why? Because they didn't have a CIBIL score and they couldn't show income proof (since everything was under lockdown and they didn't have revenue). Without a repayment track record to judge them from and no proof of income, they had to resort to gold loans or selling their property.


So when a friend of mine (Let's call him - Vijay) kept asking me about wanting a credit card, instead of advising him not to take one, I changed my mind.

At the time, Vijay did not have a CIBIL score. If he wanted to take a housing loan, the interest rate for someone without a CIBIL score would be approx. 0.5% higher than somebody with a CIBIL score above 780.

If Vijay wanted to take a housing loan of 50 lakhs, he would have to pay 3.7 lacs more over the course of a 20-year loan. This amount increases to 6.2 lacs in case of a 30-year loan!

CIBIL Score Interest Rate Lifetime Interest Paid (20 year Loan) Lifetime Interest Paid (30 year Loan)
NA 7.5 46,67,118 75,85,861
>780 8.0 50,37,281 82,07,762
Additional Interest Paid 3,70,163 6,21,901

[Five years ago, I would have thought "That's just 3.7 lacs over the period of 20 years" but after becoming a FIRE wannabe, I balk at the thought of paying that much extra. Mr. Money mustache taught me well]


So I decided to help Vijay generate a CIBIL score. Vijay did not have a payslip, (He is in the services industry and getting paid in cash) so no credit card provider was willing to give him one, even though he was getting paid in excess of the 30,000 salary threshold.

(Note: If you don't have a salary slip, banks won't give you a loan. So although Vijay doesn't have a payslip now, he is confident that he can get a formal one later. But good credit scores need a long repayment history, which is why I wanted to create a positive repayment history for him as soon as possible)

And that's when I got him an FD backed credit card. Axis, SBI, BoB, ICICI and Kotak lets you get a credit card against FD without any credit history or salary slip. Vijay took one from my bank (ICICI) and they let you use up to 90% of the FD limit. The minimum FD amount was ₹10,000 which Vijay paid up and soon enough he got the credit card over post within 7 days.

I signed him up for a yearly CIBIL subscription in order to check the results of my experiment. CIBIL scores didn't show up for the first three months.

But after three months...

He now had a CIBIL score of 740 🥳🥳

I also asked him to follow these three rules in order to improve his CIBIL score.

  1. Never spend more than 30% of your credit limit. In case you have to exceed it for some big purchase, bring the outstanding to below 30% as soon as you make the purchase by paying the difference.
  2. Always clear your dues as soon as the statement is generated. Don't wait till the last date to clear the dues and most importantly,
  3. Never buy anything on EMI.

By following the first rule CIBIL infers that Vijay is always spending within his means. Banks like to lend to people who don't need money desperately. So this will increase his CIBIL score over time.

If you forget to pay within the due date, CIBIL knocks off some points. By paying well within the due date, CIBIL infers that Vijay is a man of his words.

The third rule doesn't affect your CIBIL score directly. But buying stuff on EMI is a personal finance no-no. It is how you end up in credit card debt 3 years later and wonder "How the hell did this happen?"

Vijay followed my advice and when I checked his CIBIL score recently, I was happy. His score improved by 2 points.

How can you make use of this?

If you are a parent with kids in college: When your kids enter their undergraduate studies, get a credit card in their name with that 10k limit. By the time they finish it and want to go abroad for higher studies, they would have a decent CIBIL score which would help them get cheaper education loans for their masters abroad. [CIBIL score is linked to PAN so make sure they have a PAN as well]

You can even reduce the credit card limit for them [even though the limit reported to CIBIL would be 10,000] in case you don't trust them to use it responsibly. ICICI allows this option in Netbanking.

If you have just entered work: You would probably look for a housing loan or a personal loan for wedding expenses. Having a credit card and using it responsibly would let you rack up your CIBIL score which lets you get cheaper loans.

References:

  1. If you are in the market for a credit card and don't know which one to pick, I'd suggest going to cardexpert.in. It is run by Siddharth who has covered nearly credit card out there and I always consult his site before getting a new credit card.