No Credit History? Here's How You Can Build a Credit History and Credit Score

Before going any further, first let us understand the basics.

What is a credit score?

A credit score is a three-digit number ranging from 300 to 900 that depicts an individual’s creditworthiness. In other words, it is a number that shows the consumer’s ability to repay a loan. Out of many factors that lenders consider while approving your loan application, your credit score is the major factor as it provides an overview of how disciplined your repayment history is. A higher credit score indicates a lower probability of loan default. Hence, the higher the credit score, the more the banks and NBFCs will be interested in granting you a loan. On the contrary, a lower credit score indicates an indisciplined credit history and reduces the chances of getting a loan. Therefore, it is advisable to check your credit score periodically (once or twice a year) and take necessary actions to improve the credit score, as it is a primary factor that influences your loan or credit card application approval.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

Here are 6 smart steps to help you build a credit history and credit score:

1. Apply for a Credit Card:

Credit card providers check your credit history and credit score while approving or rejecting your credit card application. But if you need a credit history to get a credit card, then how will you get your first credit card? Well, there are a few ways you can get a credit card without any credit history. Here's how you can get your first credit card:

• Apply for a Secured Credit Card:

  This type of credit card is primarily issued by banks against collateral, which is typically backed by a fixed deposit. This means the banks ask for a fixed deposit and provide you with a credit card with 80% to 85% of the fixed deposit amount. That said, if you make a fixed deposit of Rs 5,00,000, you will have a credit card limit of approximately Rs 4,00,000. Some banks offer a credit limit of 100% of the fixed deposit amount. Since these cards are secured, i.e. backed by a fixed deposit, the banks generally offer them without stringent credit score criteria. However, banks generally have minimum and maximum credit limits for secured credit cards, which may vary from card to card.

  The bank does not hold any risk by issuing a secured credit card because it is backed by a fixed deposit. Your bank puts a lien on the fixed deposit linked to the credit card, which ensures that no one can withdraw the fixed deposit unless the bank removes the lien. So, in case you default on the credit card payment, the bank or the card issuer can recover the money from your fixed deposit to clear the dues.

• Become a Second Applicant:

  Similar to loans, there can be multiple applicants to credit cards. If you have a spouse, parent, sibling, or any relation with a person that is approved by the credit card issuer to be a second applicant, you can get your name added to their existing or new credit card with their consent. The second applicant or authorised user receives a new credit card and can share the credit limit with the primary user. Bear in mind that credit card issuers do not provide you with a separate limit; you can only share the credit limit of the primary user. You can be an authorised user only with specified relations as per the terms and conditions of the card issuer. While only the primary user is liable for the repayments, in case they miss or delay the repayments, it will negatively impact your credit score as well. Hence, before becoming an authorised user or second applicant, you should make sure the primary user has a good credit history and follows financial discipline.

• Apply for a Co-branded Credit Card:

  Co-branded credit cards are credit cards that are offered by banks and credit card companies through a partnership or tie-up with a particular brand. These cards generally have lenient eligibility criteria, and hence the chances of your credit card approval are higher. These cards offer exclusive discounts, cashback offers, reward points, etc., for brand purchases. You can also use them for any other online or offline purchases like regular credit cards. However, you might not get any rewards for purchases made outside the brand. Amazon ICICI Credit Card, Axis Bank Vistara Infinite Credit Card, IRCTC SBI Card Premier, etc., are some of the popular examples of co-branded credit cards.

2. Make Timely Repayments:

Not paying your credit card dues on time leads to debt accumulation, and it can attract late payment charges. To avoid building up the interest component and penalties, make sure that you pay all the dues on time. If you are recklessly using your credit cards, then you might get tempted to pay only the minimum amount due. However, paying only the minimum amount will increase the interest component, and you will end up paying a much higher amount. Therefore, it is essential that you timely pay your dues in full. Not paying the entire due amount on time can negatively impact your credit score. Hence, after getting a credit card, it is important to make timely repayments. To make sure you do not delay or miss out on any monthly repayments, it is advisable to register for an auto-pay facility that enables automatic credit card bill payment from your registered bank account.

3. Maintain the Credit Utilisation Ratio:

Credit Utilisation Ratio (CUR) is another crucial factor that influences your credit score considerably. Basically, it is the percentage of credit you have utilised against your available credit limit. So, you can calculate your CUR by dividing your entire outstanding credit card balance by your total credit limit. The more you use your credit card, the lower your credit utilisation ratio will be until you clear your debt. It is advisable to utilise up to 30% of your total credit limit. If you have higher expenses, using multiple credit cards can help reduce the CUR. Furthermore, you should always pay your credit card bills in full. If it is not possible, restrict utilising the credit limit beyond 30% of the available credit. If you need to use a higher credit limit, request your credit card provider to enhance your credit card limit. You can also try to get another credit card to enhance your total credit card limit.

4. Avoid Using Too Many Credit Cards:

Carefully using multiple credit cards can benefit you with a higher credit limit, improved credit score, maximum rewards, etc. However, it does carry a few risks, such as impulsive spending, difficulty in managing multiple credit cards and tracking the due dates and repayments. With multiple credit cards, the chances of delayed and missed repayments will increase, which will have a negative impact on your credit card. If you are organised, prudent at financial discipline, and want to get the most from your credit card offers, you can hold two to three credit cards as it gives you a higher credit limit, alternative cards to use in case of an emergency or a technical issue, and also increases your credit score, if you maintain the credit utilisation ratio. On the other hand, if you lack financial discipline or might not be able to manage multiple cards at a time, it makes sense to stick to the primary credit card.

5. Review Your Credit Report:

After you have utilised your credit card for at least 6 months to 1 year, you should review your credit report. You can get a free credit report every year from all four credit bureaus in India - TransUnion CIBIL, Equifax, Experian, and CRIF High Mark. If your credit score has improved in this period, you should check if you are now eligible for unsecured, i.e. regular credit cards and/or loans. In case there are any errors or mistakes in the credit report, you should get them corrected. The reports can also be used to check if you are using your overall credit in the right way. For example, if you see your credit score getting impacted due to the overuse of your credit card limit, you can take necessary precautions in the future to avoid it, which will help you improve your score.

6. Apply for an Unsecured Credit Card or Loan:

Now, after a year of building a credit history, if you see your credit score has improved and it is sufficient to take a loan or an unsecured credit card, you can apply for it as per your requirements, provided you fulfil other eligibility criteria. If you have not been financially disciplined and your credit score has come down or not changed, you must work towards improving it by following the same tips explained in the article, such as making timely repayments in full, maintaining the credit utilisation ratio, using the card regularly, avoiding too many cards, etc.

To conclude...

A credit score plays a vital role in approving your loan or credit card application. While the tips shared in the article will help you build a credit history and improve your credit score, you cannot expect it to completely change your credit score overnight. Building a strong credit history is consistent hard work that takes time. Bear in mind that there is no shortcut to improving your credit score without financial discipline. But if you follow these tips regularly and have patience, you will eventually see positive results. If you want to build a credit history and improve your credit score sooner, start practising these tips at the earliest.

Warm Regards,
Ketki Jadhav
Content Writer