No Credit History? Here is How to Build CIBIL Score from Scratch
Building Credit Score from start can be tricky. For, you ought to have a Credit History to build a CIBIL score. But this turns out to be a paradox as no bank or a financial institution will approve your Loan or Credit Card without an adequate score. And all those Instant Loan options that will come to your rescue will also be charged at very high interest rate.
Let’s find out how should one approach the task of building a Credit Score from scratch when they do not have a Credit History, Loan Account or a Credit Card to back their application.
Ways to build your credit score from beginning:
1. Apply for prepaid Credit Card
A Credit Card is a wonderful tool to enjoy financial freedom of buying now & paying later, without any additional cost. Each Credit Card comes with 40-50 days of free credit period along with multiple rewards and cash back offers. Besides all these benefits, a Credit Card is also a tool to build a good Credit Score.
However, at the same time, it is also true that you may not be eligible for a Credit Card without a credit history. In order to begin your financial journey, it is thus advisable to apply for your first Credit Card against a bank FD. For instance, you can Apply for ICICI Credit Card against a minimum of Rs 10000 deposit. The card comes loaded with all regular credit card benefits.
How Credit Card helps building a good score?
Use your Credit Card for regular transactions and pay the bill before the due date each credit statement cycle. This will build a clean credit history of repayment. Your bank will report this transactional history to the bureau. The Credit Bureau will calculate your credit Score based on this record.
Please note that you are not going to use this prepaid card forever. The purpose of this card is to build your score just enough to qualify for an Unsecured Credit Card loaded with better rewards & benefits. So make sure, you choose your first card with low annual fee and pay out your bills in time.
2. Secured Personal Loan
In case you are in urgent need of cash and want to qualify for a loan, but do not have adequate credit history you should consider applying for a Secured Loan. You can apply for a Secured Loan against any of your real assets such as Home, Car, Gold, Investments and deposits with your bank.
With collateral, the loan application is swiftly approved even if you do not have a credit history. The bank will ask for your identity, address and income proof to approve your loan application.
When you apply for a Secured Personal Loan for building a credit score, it is always recommended to Apply for a Small Cash Loan for a short duration. Apply for just enough that you can repay conveniently. It is your clean repayment history which will build your score. When you successfully repay the loan, your Credit Score will boom up and your profile will qualify for enhanced credit limit.
With better Credit Score, you can qualify for more loan amount at lower interest rate. It is always recommended to repay small loans like Personal Loan or Car Loan, before applying for a fat ticket Home Loan.
3. Purchase on EMI
In case you neither need a loan nor a Credit Card, you can consider making a purchase on EMI using your Debit Card. You can shop online or at an outlet for any of the consumer durable goods like Mobile, TV or Laptop on EMI. Most of these FMCG products including household electronics are available at discounts and EMI plans. You can open an EMI plan for 6 to 18 months. The record of successful repayment of this purchase will build a clean history of repayment and thus a good Credit Score.
4. Adopt good financial habits
In all, every time your repay a credit, it builds up your Credit Score and thus improves your likelihood for loan approval. Having a good score also protects you against unprecedented financial emergencies. You always have your credit limit as a backup for urgent cash needs.
However, to walk confidently on the path of building Credit Score you should adopt some good financial habits, as below:
- Repay regularly: Always automate your monthly repayments. This will take off burden of keeping track of repayment dates of different cards, loans & purchases. When you repay in time, it boosts your score and makes you an eligible and creditworthy customer for the bank.
- Low Credit utilisation: Each Credit Card has a credit spend limit. Make sure you keep your average Credit Utilisation Ratio below 30%. When you keep your credit utilisation low, it is considered positive credit behaviour. You are deemed fit to be lent as you do not pose any financial constraints basis your Credit Card usage pattern. On the other hand, when you frequently consume your credit limit, a red flag is generated on your Credit Information Report. Your financial health is deemed unfit to lend further and thus when you apply for loan, the application is rejected and the credit score drops down.
- Keep debt-to-income ratio low: Always ensure that your debt to income ratio is lower than 50% of your net take home income. This will not impact your day-to-day spending and ensure enough cash flow for basic lifestyle spends. Besides, high debt to income ratio makes you ineligible for further loan until you repay and ease your credit limit.
- Have a good mix of secured & unsecured loans: Always have a good mix of secured & unsecured loans. Car Loan/ Credit Card/ Loan Against Collateral are secured loans that are offered at lower rate of interest and are easier to qualify for. However, when you Apply for Multiple Unsecured Loans you create a red flag on your report and thus it may become difficult to qualify for another bank product.
- Length of credit history: Always ensure a consistency of good credit history. An old Credit Card with good credit history will always stand as the best proof of good credit behaviour. Thus do not close the card, especially when you have future plans to borrow high amount.
In all, a credit product like Personal Loan or Credit Card can help you build a good credit history within 6 to 12 months. However, in the long run, it is your utmost duty to adopt a disciplined financial life so as to be ever approved for credit in future.
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