If you've never had a credit card or taken out a loan before, you're not alone. There are many people out there like you who have never used credit from a bank or lender and thus have no credit history.
If you read our blog regularly, you're probably familiar with the term "credit score." Any credit bureau in India requires a credit history to calculate your credit score. Don't worry if you've never had a credit instrument before! It is not too late to begin building your credit history from the ground up by following some extremely simple yet effective tips.
Here are a few pointers to help you begin building your credit history:
How to Build a Good Credit History?
1. Apply for a Credit Card Right Away
To avoid the situation in which you set your sights on applying for a loan in the future and begin to worry about your insignificant credit history, we recommend that you apply for a credit card right away. Applying for and maintaining a credit card is one of the quickest and safest ways to establish credit.
The majority of lenders and banks are unwilling to work with borrowers who have no credit history. So, in order to build credit, you must also use credit. Investigate, compare, and choose banks that are willing to offer you a credit card despite your lack of a credit history. You can choose a credit card with a low credit limit at first, but this will gradually increase as you use the credit.
2. Avoid the Temptation of Applying for Multiple Credit Cards All at Once
We understand your desire to begin building a credit history as soon as possible, but applying for credit cards in multiple places will do you more harm than good. The reason for this is that whenever you apply for a credit card anywhere, the lender checks your credit profile and can see any credit inquiries you've made.
This works against you because multiple applications can give the impression that you are a credit-hungry borrower. Every time a lender pulls your credit report, your credit score drops slightly. There is no point in allowing your credit score to fall, especially if you are trying to improve it. The bottom line is to apply to one place where you meet the eligibility criteria and then wait to hear back.
3. Keep Spending on Your Credit Card Regularly
As previously stated, in order to build credit, you must use credit. Credit bureaus calculate your credit score based solely on your credit history. It is impossible to build a good credit score if you have no transactions or credit history.
The key takeaway here is to continue using your credit card on a regular basis for things like gas, groceries, monthly spending, paying utility bills, dining out at restaurants, and so on. Not only should you use your credit card, but you should also make timely and diligent credit card payments. Spending on your credit card on a regular basis will keep it active, but be careful not to overspend as this will increase your credit utilisation ratio.
4. Closely Watch Your Credit Utilization Ratio
Every credit card has a maximum spending limit, which is also known as the available credit limit. When you begin using your credit card on a regular basis and are new to the world of credit, your credit utilisation ratio is calculated and is included in your credit report.
The credit utilisation ratio is the difference between the amount of credit you have available and the amount of credit you actually use. To maintain a healthy ratio, this ratio should be kept under 30-40%. This shows that although you’re new to credit cards, you’re not overspending and are being cautious with the spends.
If you are successful in managing your credit ratio, your future will undoubtedly be brighter. This will reflect positively on your credit profile as a credit-responsible borrower.
5. Pay EMIs Religiously on Time & In Full
If you have a credit instrument, you should be aware that the lenders send all of your credit data to the credit bureaus in India. The bureaus then use this information to calculate your credit score.
This refers to all records of payments made against credit card bills and loans. If you've always made your credit card payments on time and have never missed or delayed one, this will reflect favourably on your credit profile. Always make sure to pay your credit card in full and on time.
Credit history is not built in a day, but every day's effort contributes to the development of a strong credit profile. It takes at least 6 months and up to a year (or more) to build a good credit score. So, if you want to build and maintain a good credit score, just stick with it and follow the above-mentioned advice.
Meanwhile, once you've reached a significant stage in building a credit history, keep a close eye on your credit score and monitor it on a regular basis. This will keep you from deviating and, if necessary, will allow you to take corrective action.