No credit history? Do not 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 your loan application. A high credit score indicates that you are a responsible borrower with good credit behavior. It means that you have a long history of maintaining credit with regular payment habits. When you apply for a loan, most lenders run a credit score check and ask for a credit score of 725 or higher to approve your loan application. However, if you have never applied for a loan in the past, how would you prove your creditworthiness to your lender?

If you don’t have a credit history, don’t worry! Here’s how to build your credit score so you can apply for a loan with better eligibility.

What is a credit score and how crucial is it to your finances?

Lenders and credit card issuers report all of their credit-related activities to the credit reporting agencies, based on which they create your credit report and calculate your credit score. They consider several factors when calculating your score, including payment history, length of credit, diversity in credit profile, debt-to-income ratio, credit utilization ratio, and others. The credit score ranges from 300 to 900. The more responsibly you manage your finances, the higher the credit score you can achieve. Most lenders will not approve your loan if you have a credit score of less than 725.

Having a credit score greater than 725 has various benefits, including the following:

    • Greater chances of loan approval
    • Approval for a larger loan amount
    • Approval of loans with a lower interest rate
    • Approval of a longer loan term
    • Proof of high credibility for lenders.

Steps to build a credit score with no credit history

If you don’t have a credit history, don’t worry. You have to start somewhere. These are some steps to follow:

1. Get a small loan

Lenders generally will not lend you a loan if you have no credit history. However, you may find some lenders who agree to lend to you, but at a higher interest rate. Taking a small loan with a high interest rate may not make a big difference. However, you can increase your credit score by paying it on time. So a small loan amount with high interest can be a tool for building a credit score, even if it costs a little more.

2. Choose a longer loan tenure to extend your credit history

Taking a small loan for a longer tenure can lengthen your credit history. At the same time, you 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 your EMI amount. Therefore, select a longer loan tenure to keep your EMIs below budget, even though they may incur higher interest expense. A little more you pay for such a loan would be worth the credit score you build up over time.

3. Keep your old accounts open

Remember if you opened an account during your school or college days. You may no longer use it, but you should keep it open to extend your credit history. Credit bureaus like to know how long you’ve been managing your credit. The older your account, the longer your credit history will be. Even if you no longer use that account, closing it will not help you in any way. However, keeping it open can increase the length of your credit history. Therefore, you must keep your old accounts open even if you do not trade them now.

4. Request an additional card

Many banks in India offer add-on cards that allow you to share the benefits of a credit card together with the primary cardholder. When you request an additional card, you get another copy of the card that you can use. You get the same benefits and credit limit, just like the main card. Your parents, spouse, or anyone else can share their primary card with you. The expenses that you and the primary cardholder made with the card are consolidated into a single statement.
An additional card can be very beneficial in building a credit score, as long as you and the primary cardholder are regular with your card bill payments. When you or the primary cardholder pay the bill, it appears on both your credit report and the primary cardholder.

5. Apply for a fixed deposit credit card

Most lenders won’t give you a loan if they can’t find a credit history after a credit score check. You also won’t be able to get a credit card 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 fixed deposits that you have made with your bank. Use your FD-backed credit card wisely and it can become a great tool to help you build a credit score.
A credit card against FD is a type of secured loan in which the amount of your FD is the guarantee against your card. Your FD amount determines the limit you get with this credit card. The higher your FD amount, the higher your credit card limit. If you don’t pay your credit card bills on time, the bank can get your installments back from your FD. So taking a credit card against your FD can be a great way to build credit and earn loan eligibility later on.
With the steps mentioned above, you can build your credit score over time. Once your score reaches 725 or higher, you can apply for a personal, business or home loan from Clix Capital. Keep checking your credit score online and monitor its improvement over time.
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