How to build a credit history when you have none
You may have just started working and have never taken credit. Or you may have had a long working life and never had to take a loan or a credit card. If so, you probably don’t have a credit history—something that hits you finally when you try to get a loan or a credit card. With all other histories and documentation, what exactly is credit history and why is it important to your finances?
What is credit history?
Let us start by understanding what credit history is. Credit information companies such as CIBIL and Experian collect and maintain loan repayment records of both individuals and commercial entities. This includes details of the amount of credit you hold, the number of times you’ve applied for loans and credit cards, how much you’ve borrowed, the EMIs, their payment dates, the times you were late with your repayments, details of the loan or credit card closure—in short, every information regarding how you use your credit. These records are used to create a Credit Information Report (CIR), or credit history, and credit score. These scores—ranging from 300 to 900—are used by banks and lenders to evaluate and approve loans.
The credit history is built based on your financial habits pertaining to the credit you hold, so you cannot have a credit history and score without taking some form of credit. At the same time, the credit score and history are among the primary checks a lender makes while approving a loan or credit card. So this presents a conundrum: how do you build a credit history without taking credit if you can’t get credit without a credit history.
Actually, it is not that hard. There are several simple ways in which you can build up your credit history and score.
Take a small loan
If you are salaried, then chances are that you would have a pre-approved loan from the bank holding your salary account based on your relationship with the bank. You could take a small loan and repay it in a timely manner just to create a credit history. You could also opt for a payday loan via a fintech. Alternatively, the next time you shop, you could buy some of your electronics on EMIs. Several online marketplaces as well as electronic shops give you this option. The amount does not need to be large. It is about taking some credit and then repaying it promptly so as to initiate a history of borrowing and repayment.
Get a credit card
Your other option is to apply for a credit card. Several banks provide credit cards to people without credit histories. Again, the credit limit may be low, and you may have to start with a no-frills card, but once you start using it regularly, it would help you build a strong credit history. In case you are unsure about your chances of getting a credit card for any reason, you can opt for a credit card against a fixed deposit you hold. In this case, the credit card would be issued by the same bank where you have the FD and would have a credit limit of about 70% of the FD value. This makes it a secured credit card for the lender as the FD acts as a guarantee.
Your actual task starts after you have taken the loan or credit card. A good credit history is built on three things: prompt and timely payments, a financial strategy, and attention to detail. On-time payments are the biggest factor affecting your credit history and score. They are essentially a measure of your timeliness and, by extension, your creditworthiness. So, be it your credit card bills or your loan EMI, try to pay it before the due date every single time. Delay of even a single day gets recorded in your credit history. Also, it is best to pay your entire credit card bill every time before the due date. If you cannot pay the entire amount for whatever reasons, try to pay as much as possible and not just the minimum amount.
Low credit utilization ratio
The credit utilization ratio is a very important factor in your credit score computation. It reflects the percentage of available credit being used. For example, if the credit limit on your credit card it Rs. 1 lakh and your average monthly spend comes to Rs.40,000, your credit utilization is 40%. However, if you had two cards with limits of Rs. 100,000 each, and your total utilization is Rs.40,000, your utilization ratio is 20%. A very high utilization is considered as a potential risk. So it is best to keep your credit utilization ratio under 30%.
Credit report monitoring
There is always a possibility that errors creep into your credit report. This could be minor differences in repayment dates to major problems like a loan or credit card account not closed but settled or even downright identity theft that could lead to a drop in your credit score. The sooner you have a view into this, the sooner you can correct your course. So, download and read your credit report at least once a quarter to keep track of the developments. Check if all the information against your name is correct and up to date. If not, then report it to the credit bureau immediately so that your credit score isn’t negatively impacted.
Following these steps will help you build a credit history and, therefore, a good credit score. It will let you chase bigger dreams and aspirations as you have better access to credit and more financial support and to fulfil those aspirations.
Disclaimer: The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans, credit cards, and more.