8 Ways to Build Credit if You Have No Credit History

Many borrowers are unaware of the consequences of no credit history. Some people believe that having no credit history is the safe side. Having no credit history also makes you ineligible for any evaluation by credit bureaus. Credit appraisal is the process by which banks and lenders check your credit history and credit behaviour to decide whether to approve a loan.

●     Half of all Indian citizens are still uninformed on healthy credit practices.

●     451 million Indians have no credit history and are called ‘credit invisible’.

This automatically conveys that almost 50% of Indians discover their low credit score after being heavily rejected on their loan applications.

What are no credit history, credit unscorable and credit invisible?

NH or no credit history simply means that you have never used credit or taken any loans yet. This means that your credit history or repayment behaviour is ineligible for evaluation by lenders, credit bureaus and banks.

Credit Unscorable means you have insufficient credit usage history. This can also mean that you haven’t used credit in the past six months. This is also called 0 credit score because you are new to credit and yet to build a credit score.

Credit Invisible means you have no credit usage at all. Bureaus mark this as having failed to meet evaluation criteria. This can be called a -1 CIBIL score because there are no risk indicators.

8 Ways To Build Credit If You Have No Credit History

Taking loans and other credit without credit history is difficult but not impossible. Getting approved for an unsecured credit card or loan can be difficult with no credit history or score. The following steps can help you start at this stage. After this, you can take up standard loans and credit card payments to improve and maintain your credit score.

Gold or FD-backed Loan

A Gold or Fixed deposit loan is a collateral-based secure loan. When you pledge your gold assets for a loan exchange, the CIBIL score factor is eliminated. A fixed-deposit loan is approved immediately without further check-ups. The collateral is used as security.

Secured Loan/ Secured Credit Card

A secured loan is a loan given in exchange for an asset like property, car, etc. This asset is seized if you are unable to pay your loan back. A secured loan is much more favourable because of lower interest rates, longer repayment periods, and higher loan limits.

The types include mortgages, auto loans, and real estate loans. A secured credit card is offered in exchange for a cash deposit, which can be refunded or seized as required. This deposit determines the card limit. This is easier to obtain even with no credit history, as you already have security backed against your card.

Read More: Which Loan is Best For Building Credit?

Credit-Builder Loan

A credit builder loan is specifically designed to build or improve a credit score. The loan amount is held back while you keep repaying the instalments. You get your deposit amount when you have successfully paid back your due amount. The lender or bank reports this credit behaviour to the credit bureaus like Equifax, CIBIL and Experian.

Become An Authorised User

An authorised user is also called the secondary cardholder. Ask a family member or friend to add you as an authorised user. Beware that their credit score and habits will directly affect yours too. Therefore, choose someone with a good credit score and repayment habits. You will not be liable for dues while having access.

Consumer Durable Loan

A consumer durable loan is a pre-approved loan even for those with no credit history. All it needs is KYC, income proof and other documents. It is taken for any household items or electronics, with any set limit of up to 15 lakhs. The monthly instalment is often available at no cost through EMI.

Credit for Debit Card

Few credit-building debit cards traditionally use money from your savings account for EMIs, but also report to credit bureaus. This also eliminates the risk of debt and controls your expenses. The deposit money acts as your spending limit.

Buy-Now Pay Later

This is a short-term borrowing option that lets you buy products and pay back in monthly instalments. Usually, there is no interest involved if the amount is repaid within the tenure. ZestMoney, Amazon Pay Later, LazyPay, and Simpl let you pay later in EMIs.

Report Rent and Utilities

To report rent and utilities like monthly bills and subscriptions, use a third-party service. The timely payment of obligations like rent and electricity bills can hence be reported as credit history to credit bureaus.

Time taken to generate first credit score

If you're new to credit, bureaus and banks might still not have sufficient credit history to assign you a credit score. You have to build a steady borrow-and-repay cycle naturally over a course of 3 to 6 months for your credit score to appear. Secured loans and other short-term loans are expected to emerge faster than long-term loans.

Best credit cards for first-timers

The following cards are specially built for those new to credit, so you don't have to worry about approval of traditional credit cards with no credit history.

These cards are optimised for new credit users because:

●     They are accessible and approve people with no credit history (NH) or thin file.

●     They control spending limits by having a specialised credit limit.

●     They reward the expenses typically made by newbies.

●     They are manageable and easy to repay.

●     They grow as your beginner status upgrades.

How to maintain credit score

Here are the simple steps to maintain your credit score after you have successfully built a credit score:

1.    Pay Your Bills

Pay bills on time or before the deadline to tell the bank and lenders that you are consistently responsible towards your repayments. Missed payments and defaults can considerably affect yoru credit score, even if you have a considerably high tier score.

2.    Lower Your Credit Usage

A low credit usage of up to 30% of your credit limit is ideal, especially when you are looking to grow or improve your credit score. This tells the bank how you manage your finances. Overusing the credit limit shows overdependence on credit and too much debt.

3.    Natural Credit Mix

A credit mix of secured and unsecured loans, EMIs, credit cards, etc. is a great impression of credit diversity. It should be built naturally instead of forcing a diverse source of credit. Building a credit mix and using it judiciously tells the bank that you have financial skills to manage multiple types of credit.

4.    Pay Off Debts

The point of building credit is applying for credit consistently. Instead of focusing on taking debt, try to pay them back in full well before time. This shows the banks your skill in managing debts.

5.    Maintain Account Age

Account age is an important factor of credit score that tells the banks that you are experienced in financial management. The older your account history, the more credit activity the bank has access to. This increases your CIBIL score. Therefore, keep your old account activities instead of discarding them.

6.    Monitor your credit report

Monitoring your credit report is a critical part of credit building and improvement. Without regular credit score checks, your credit score is vulnerable to many delinquencies like errors, fraud, and even missed payments that are affecting your score silently.

Conclusion

To many people, credit building is still a foreign concept. Once you decide to step into the credit world, you need to choose a strategy to build credit from scratch. Instead of staying credit invisible, explore the huge array of options to build credit without worrying about traditional approval procedures. Use a credit builder loan, buy now pay later, gold loans, secured credit cards, etc., to build credit with no credit history.

Once you see results in the form of a credit score, you can effectively upgrade your status to a growing credit user. With motivation nd discipline, you can transform your journey from  ‘credit invisible’ to an empowered and skilled borrower.

 FAQs

1. What is Credit Invisible?

Credit invisible are those who shy away from building a credit profile and have never used a credit product even once.

 2. Is there an Amazon Pay Credit Card?

ICICI Bank Amazon Pay Lifetime Free Credit Card is a free-for-life card that enables people without any credit history to build their credit profile and earn some rewards. With this card, one earns cashback of 1%-5%, which is added as Amazon Pay Balance and can be redeemed while shopping, paying bills, and making recharge payments.

3. What are credit-building debit cards?

These are the kinds of debit cards that allow those who have no credit score at all to make payments through their bank account while simultaneously maintaining their usage behaviour with the credit bureaus. This debit card comes with options such as cashback, EMI conversion, and bureau reporting.

4. What is meant by no credit history?

A person with no credit history has never taken a loan or used any credit instrument; thus, there is no data about his/her ability to repay the borrowed amount. In India, this is known as being “credit invisible.”

5. How much time does it take to build up the first credit score?

Three to six months of regular usage of credit instruments is sufficient for the generation of your first credit score. A quick way is to take up a short-term loan, for example, a secured loan or a consumer durable loan.

6. Is Buy Now Pay Later safe for first-time borrowers?

Banks provide you with credit options such as ZestMoney and Amazon Pay Later that could build your credit in case you repay it on time. It is a short-term service without any interest; however, late payment will harm your score, so be careful with it.

7. What is the difference between credit invisible and credit unscorable?

If you do not use any credit, you are considered credit invisible. When you use credit but not enough to estimate your score by the bureau, you become credit unscorable.