No Credit History? Don’t Worry. Here’s How to Build Your Credit Score
Your credit score is one of the most crucial factors that lenders look at while scanning through your loan application. A high credit score indicates that you are a responsible borrower with good credit behaviour. It means that you have a long history of maintaining credit with regular repayment habits. When you apply for a loan, most lenders conduct a credit score check and ask for a credit score of 725 or above to approve your loan application. However, if you have never taken a loan in the past, how would you prove your creditworthiness to your lender?
If you have no credit history, don’t worry! Here you will find out how to build your credit score so that you can apply for a loan with improved eligibility.
What is a Credit Score, and How Crucial is it for your Finances?
Lenders and credit card issuers report all your credit-related activities to the credit bureaus, based on which they create your credit report and calculate your credit score. They consider several factors while calculating your score, including repayment history, credit length, diversity in the credit profile, debt-to-income ratio, credit utilisation ratio, and others. Credit score ranges from 300 to 900. The more responsibly you handle your finances, the higher the credit score you may achieve. Most lenders do not approve your loan if you have a credit score of less than 725.
Having a credit score higher than 725 has several benefits, including the following:
- Higher chances of loan approval
- Approval for a bigger loan amount
- Loan approval with a lower interest rate
- Approval for a longer loan term
- Proof of high credibility to the lenders
Steps to Build Credit Score with No Credit History
If you have no credit history, don’t worry. You need to start somewhere. These are a few steps to follow:
1. Take a Small Loan
Usually, lenders would not lend you a loan if you have no credit history. However, you may find some lenders who may agree to lend you but at a higher interest rate. Taking a small loan amount with high interest rate may not make a big difference. However, you may build your credit score by paying it on time. Therefore, a high-interest small loan amount may be a tool to build a credit score, even if it costs a little more.
2. Choose a Longer Loan Tenure to Lengthen Your Credit History
Taking a small loan for a longer loan tenure can lengthen your credit history. At the same time, it can also keep your EMIs low so that you can easily adjust them in your monthly budget. The shorter the loan tenure you choose, the higher will be your EMI amount. So, select a longer loan tenure to keep your EMIs under budget, even though they may lead to a higher interest outgo. A little extra you pay for such a loan would be worth the credit score you build over time.
3. Keep Your Old Accounts Open
Remember if you opened an account during your school or college days. You may not be using it any longer, but you must keep it open to prolong your credit history. Credit bureaus like to see how long you have been managing your credit. The older your account is, the longer will be your credit history. Even if you are no longer using that account, closing it won’t help you in any way. However, keeping it open can add to the length of your credit history. Therefore, you must keep your old accounts open even if you do not operate them now.
4. Apply for an Add-On Card
Many banks in India offer add-on cards that allow you to share the benefits of a credit card along with the primary card holder. When you apply for an add-on card, you get another copy of the card that you can use. You get the same benefits and credit limit, just like the primary card. Your parents, spouse, or any other person can share their primary card with you. The expenses you and your primary card holder made with the card are consolidated into one statement.
An add-on card can be highly beneficial for building a credit score, as long as you and your primary card holder are regular with the card bill payments. When you or your primary card holder pays the bill, it shows up on both you and your primary holder’s credit report.
5. Apply for a Credit Card Against a Fixed Deposit
Most lenders will not give you a loan if they find no credit history after a credit score check. You won’t be able to get a credit card either with which you can build your credit score. However, one option available to you is a credit card against your Fixed Deposit (FD). Some Indian banks offer credit cards against the Fixed Deposits you have made in their bank. Use your FD-backed credit card judiciously, and it can become a great tool to help you build a credit score.
A credit card against FD is a kind of secured loan in which your FD amount is the security against your card. Your FD amount determines the limit you get with this credit card. The higher your FD amount is, the higher would be your credit card limit. If you do not pay your credit card bills on time, the bank may recover their dues from your FD. Therefore, taking a credit card against your FD can be an excellent way to build credit and gain eligibility for a loan later.
Using the steps mentioned above, you can build your credit score over time. Once your score reaches 725 or above, you may apply for a personal, business, or home loan from Clix Capital. Keep checking your online credit score and monitor your improvement over time.
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