No Credit history, no Credit card? Real Catch 22 situation!

Ritesh recently passed out of a B-school and joined an upcoming chemical company in Mumbai at a package of Rs. 4 lakhs per annum. He was happy to shift to Mumbai as his best friend Mayank had already joined a major FMCG, listed on Stock exchange some days ago in Mumbai. Mayank’s package was Rs. 3.6 lacs per annum. Ritesh joined Mayank in his rented a flat in Mumbai suburbs.

After joining their respective companies, they got busy with their new job and eagerly awaited the weekend to catch up. On leisurely Sunday afternoon the talks moved towards banks account, specifically salary account. Suddenly they realized that their salary account was with the same bank though branches were different.

The time went by and three months passed. It was then that Mayank got a call from the bank to check if he would be interested in a credit card from the bank where he had salary account. He readily agreed and gave all the documents to the bank for getting the credit card. In a span of some 15 days, his very first credit card arrived.

Now Ritesh also thought of getting a credit card for himself. Ritesh applied for a credit card on the website of the same bank and very soon he also got a follow up call from the bank. He submitted all the documents. Surprisingly, his application was rejected and the bank sent a nicely worded refusal letter. Ritesh was quite surprised, as Mayank had managed to get a credit card despite having a lower package.

This is a very common problem faced by many first time employees like Ritesh (with just a few months working experience) when they apply for a credit card and they don’t get the same even though they have a decent package.

Let’s see why this happens:

Whenever one applies for a credit card (or any kind of loan), the bank or the NBFC gets a report from the credit information company (the biggest of which is CIBIL). CIBIL is a body, which collects information from various banks and NBFCs across India about the payment history of individuals for the loans or credit card issued to them. The bank refers to this report to find out about the payment track record of a person.

As Ritesh was first time applicant for any credit, he had no record in the credit bureau to be reported to his bank. Banks don’t like to provide unsecured credit (credit card is an unsecured credit line up to the credit limit) where the proposed borrower does not have a repayment history of some sort.

This problem in fact may persist even if Ritesh had more work experience under his belt. So this is a classical chicken and egg situation. You cannot get a credit card because you never had one earlier (and of course you never had one earlier because you could not get one).

So how to overcome this situation?

Well there is a way out for this issue. First secured loans are relatively easier to get even without a credit information report. So if Ritesh applies for a car loan he is likely to get it relatively easier though the down payment requirement may be a little higher and the bank may not provide its best rate to him. He can of course get a home loan but normally all lenders would require a minimum of 2 years of work experience before a home loan is given. Ritesh can then build a track record on the car loan and get a credit card soon afterwards.

But what happens if Ritesh does not intend to buy a car?
In that case he needs to build a track record for himself. His best bet is to take a credit card against the security of a fixed deposit with the same bank. These credit cards have a limit of around 80% of the value of the Fixed Deposit. These credit cards are easily available as they are secured credit cards and in case of any default the banks can use the fixed deposits to recover the credit card dues.

Once you have this secured credit card, you should create track record of paying the bills on time. This will help you create a payment track record with the bank and the bank will report the same to CIBIL and your credit report will slowly build up. Getting an unsecured credit card or an unsecured loan will be relatively easier for you once you have a sufficiently long payment track record of at least 12 months. This will also enable you to break the chicken or egg syndrome.

But lets go back to our friends Ritesh and Mayank. Now how did Mayank got a card though he too never had a loan or credit card in the past?

Well there is a specific reason why Mayank got a credit card and Ritesh did not. Generally each bank has a list of companies, which they categorize in ‘A’, ‘B’ and ‘C’ list, or an uncategorized list. Luckily the FMCG company, which Mayank was working with, was among the ‘A’ category company according to the bank and hence the banks are more than willing to provide a credit card to him despite his lack of experience and prior repayment track record.

The bank had prior experience with providing credit to other employees of Mayank’s company and it had a good experience and hence was willing to take the risk. Ritesh’s company’s fell in the uncategorized category where the bank was not willing to take the risk of providing an unsecured credit card to a person who has no existing repayment history.

The moral of the story is that your employer’s status can also help you in breaking the chicken or egg syndrome without having to go through the slow process of building your repayment track record. But if you cannot break that syndrome, build your credit history gradually.

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