In today’s fast-paced world, credit is a necessity for most and the saying ‘to get credit, you must have credit’ is apt but often frustrating for new borrowers. Building credit from the start can be challenging since credit history is a prerequisite for building a credit score. The irony faced by new borrowers is that no bank or financial institution would easily approve a loan or credit card without seeing the applicant’s credit score.
It’s a catch-22 situation. To build a good credit score, you need to take on credit. But, to get credit, you need to have a good credit history!
Worry not, here we share seven smart tips on how you can build your credit score from scratch.
Apply for a Credit Card
Most banks and credit card issuers avoid lending finances to applicants who do not have a credit history. They rely on an applicant’s credit history to assess his/her repayment capability. Therefore, for borrowing fresh credit, one must have credit or should have used credit in the past.
Therefore, the question that arises is, if lenders cannot give credit to new borrowers, how can one build credit? Borrowers can heave a sigh of relief as there are a few ways to do so.
One of the commonly used financial products for starting a credit journey is a credit card. Applying for a credit card is easy and can help in easily building a credit score without relying on banks or lenders. One can apply for either a secured or an unsecured credit card.
Avoid Applying for Multiple Credit Cards at Once
Every credit card application impacts one’s credit score. Hence, a borrower must try to avoid numerous credit card applications within a short duration. Lenders often consider multiple applications as credit-hungriness of a borrower. While building a credit history, one must be careful not to hamper the credit score by multiple credit card applications. Instead of applying for multiple credit cards, it makes sense to use one that can help in showcasing one’s credit handling capability. While using a credit card, one must try to keep the credit utilisation low and make the bill payments in full and on time.
Additional Reading: How many credit cards should a person hold?
Use Credit Cards Often But Cautiously
One may not have a credit score either because they have never used credit or their credit history is not considered by bureaus as sufficient. Those who want to build a good credit score must ensure that they use a credit card regularly.
A good credit score can be built in the long run, but it requires regular use of credit cards along with timely repayments. It makes sense to use a credit card at least once a month to keep the credit card active. This can help those who have a good credit history and also those who want to build one from scratch.
Become an Authorised or Co-User
Another smart way to build a credit score from scratch is by becoming a co-user or authorised user of an existing or primary user’s credit card. If, for example, an individual’s spouse or family member is using a credit card, one can request them to become the card’s authorised user. Those who are new to credit must be extra careful about using it since a single misuse can have a direct impact on one’s credit score and also the credit score of the primary owner.
Check Credit Utilisation Ratio
All credit cards come with a credit limit, which is the maximum amount that a user can spend in a month. While calculating a credit score, credit bureaus often consider the credit utilisation ratio of credit card users. It is a ratio of the available credit limit and the amount a user spends through the credit card. Closely monitoring this ratio is very important since it reflects how well one can manage the available credit. If users do not want lenders to get an impression of being credit-hungry, it is important to limit the credit utilization ratio to 30%–40% of total available credit.
Additional Read: What’s a good credit utilisation ratio?
Make Timely and Full Credit Card Bill and EMI Payments
Lenders usually report borrower’s credit data to credit bureaus from time to time. This is taken into consideration while preparing a credit report and calculating the credit score. Debt repayment history is one of the most influential factors considered while evaluating credit history. Therefore, a single miss or a delay in repayment of loans or credit card bills can negatively affect credit score. Thus, borrowers must ensure full and timely repayments to build a healthy credit score.
Smart use of Unsecured Credit Cards
A minimum of six months of regular credit card usage is required to gather sufficient information which can be used by credit bureaus to generate a credit report. Borrowers looking for secured credit cards to build a good credit history should use them enough to demonstrate good financial management skills.
Credit history takes a long time to be built, depending on how well and how often one uses credit. Building a good credit score may take additional time. Those who want to achieve excellent credit scores and also maintain it must keep working towards it by ensuring appropriate and disciplined credit usage, including timely loan repayments and credit card bill payments.
- How can I get a credit card with no credit history in India?
People who do not have a credit history or a credit score can make use of secured credit cards. These are offered by most banks in India to individuals who lack credit history. To get a secured credit card, all you need is to open an FD with the bank and get the card against the fixed deposit.
- How can I build my credit history in India?
One can slowly build a credit history in India by making regular and judicious use of credit cards, keeping track of EMI deadlines, maintaining a low credit utilisation ratio, etc.
- What if I have no credit history?
If there is no credit history, there will be no credit score. This can cause hurdles for an individual looking to make fresh credit borrowings. Therefore, it is important to begin somewhere by using credit cards as this gets reported in credit reports and helps in creating a credit history.
- How do you establish a credit history if you've never used credit?
Those who have never used credit can establish a credit history by becoming an authorised or co-user of a credit card owned by a family member. One can also apply for a secured credit card and make frequent use of credit cards to build credit history within a short period.
- Can you pass a credit check with no credit history?
Most lenders may not pass a credit check of an applicant with no credit history. This can make it difficult for one to borrow fresh credit. However, one can apply for a secured credit card to establish a credit history.