A credit score is important for a strong financial future and profile. It is a crucial step that secures your future for important opportunities and emergencies. Many people assume that refraining from taking any credit lines for financing is like staying on the safe side. However, the truth is starkly contrasting.

When you unexpectedly need emergency funds or for an important life decision, you realize that credit is more than just borrowing. It is a comprehensive picture of your financial skills and identity. Furthermore, having no credit history is a really adverse point to begin with when you are planning to take out a loan. Credit history is the key to receiving funds for a loan or credit because it assures the lender of your creditworthiness and a secure repayment process.

Why is credit building important for first-time borrowers?

As a first-time borrower, building credit is not about borrowing but establishing a track record that proves that you are a reliable payer. Begin with relatively low-risk activities such as a secured credit card, a credit-builder loan, or being an authorized user, making payments on time, and keeping your credit utilization at less than 30% (ideally 10%).

The credit score and credit history are much more than just formulas that calculate your creditworthiness. It records your financial management skills.

For a first-time borrower, it grants access to loans, cheaper interest rates, and fast processing when you need to borrow money during an emergency situation or cover some important expenses. The lack of credit history means a lack of evidence of practical repayment ability. As a result, lenders, landlords, insurance companies, and some employers consider such clients risky, and either refuse to provide services or require a co-signer or pay extra fees.

What you are missing out on as a first-time borrower…

1.      Influences interest rates and fees—

The borrower will pay lower interest rates and fewer fees on a good credit history; a poor one raises interest charges. 

2.      Established financial identity—

You are simply invisible to lenders without a credit record, which clearly shows your financial management skills. It is a defining factor of your financial future.

3.      Loan Approval—

Instant access to loans if you have a defined credit profile; if not, lenders may hesitate to lend or reject you outright.

4.      Gives quicker access to emergency financing—

Lenders will approve a loan faster if the person has a track record of reliability.

5.      Influences credit limit and terms—

A good credit history opens up higher limits, longer repayment terms, and more flexibility.

6.      Can affect daily activities—

Renting an apartment, getting a cell phone contract, and some occupations involve credit checks; having a history makes the process smoother.

7.      On-time payment is key—

Payment history is the most critical factor for all credit scoring models.

8.      Credit usage is important—

Maintaining a low balance compared to the total limit (under 30% or even under 10%) increases the score.

9.      Credit age and diversity matter—

Old accounts and proper credit diversity make a person look better on paper.

10.  Multiple inquiries decrease the chances—

Having several hard inquiries within a short period means higher risk.

11.  Little by little, actions matter—

Utilizing small sums of credit on a regular basis and paying them off makes the credit score better over time.

12.  Monitoring protects from surprises—

Save yourself the shock of unexpected fraud and errors that could cause serious consequences.

Read More: Build and Improve Credit Score With Your First Credit Card

What are NH, 0, -1, and credit invisible?

These terms do not necessarily tag you as a bad borrower—they simply show lenders that you are practically lacking data that is used to evaluate creditworthiness.

NH or No History: You have never taken out credit or a loan, so a repayment record hasn’t been created.

Credit invisible: You have no credit usage at all; the lender can't determine your creditworthiness.

0 credit score: You are new to credit; your credit history is less than 6 months, and a first-time credit score hasn't been generated, determined, or calculated yet. This is because the activity is simply not enough to establish a pattern of behavior.

-1 credit score: Equivalent to NH/NA, indicating no credit history exists. It can also indicate inactivity for a long period or something similar, which makes it difficult to evaluate your score.

Build CIBIL Score as a First-Time Borrower

For someone who is just starting, the question is simple: How do you build your CIBIL score when you have little or no credit history? The point is to start applying for loans or credit cards if you don't have one yet.

Hesitate to make too many applications, as it can result in hard inquiries and a drop of 5 to 10 points. Start with a single small personal loan, preferably a pre-approved one since you don't have a credit score yet. A credit score is an important threshold marked by lenders to provide you with a loan based on your creditworthiness.

1.      Credit Builder Loan

A credit builder loan is designed specifically to build credit and a repayment record on secure terms rather than for the amount of money you would get from a personal loan or any other standard loan.

The money from the loan is held in your bank account until you have successfully repaid your credit. It is an effective way to build credit with consistent and timely repayments. If you find a lender offering such a product, check the following:

●       Interest rate

●       Fees

●       Repayment terms

●       Total cost

●       If the lender reports to credit bureaus at all

2.      Secured Credit Card

Getting a regular credit card without a credit history may be tough. Therefore, a secured credit card is a safe and interesting option.

In India, secured credit cards are available where the amount in fixed deposits is tied to the limit on the credit card. CIBIL mentions applying for a secured credit card against fixed deposits as one way of building a first-time credit score.

Use the credit card only for purchasing items that are already affordable and not to see the credit limit as extra money. Responsible credit usage and repayment will help you inculcate good credit behavior right at the beginning.

3.      FD/Gold-backed loan

Another option could be secured lending using an asset such as fixed deposits or gold.

But if your aim is building a first-time credit score, then you need to make sure with the lender that the details of your loan and the repayments would be reported to the credit bureau. Otherwise, taking up loans may not help in building a credit history.

However, even in the case of secured borrowing, affordability should be the key factor. It is seldom necessary to incur additional cost in the form of interest or taking any extra risk just for the sake of building a first-time credit score.

4.      Become an authorised user

Becoming an authorised user with someone consistent and good with credit management and behavior automatically builds your first-time credit score.

It is a common assumption that people have about becoming an authorised user.

But the thing is, you need to be careful with this approach if you are looking to work on it.

Check with the bank authorities if your credit will actually be reported in such a setting. Ask them how this will impact your credit. Your personal line of credit is very helpful in this regard. What you can actually use it for is when you are struggling to build your first-time credit score and getting rejected by lenders. You can call this 'piggybacking.'

If the primary cardholder drops your name from their account, your history will shorten again. 

5.      Consumer durable loan

A consumer durable loan is another entry point for beginners; it is simple and basic. CIBIL has explained that a person with no credit history can easily take a consumer durable loan for an electronic or household item.

An important aspect of a first-time credit score is that you should keep it natural. Do not buy an expensive product simply because you want credit. If you genuinely want a new product and can afford to repay it responsibly, then a consumer durable loan is the option for you.

6.      Start small but consistently

The most common myths about establishing a first-time credit score are that one needs large credit accounts or many credit cards for a good credit score. 

Not at all.

As per CIBIL, as a first-time credit user, taking up one account at a time will be a more controlled approach. CIBIL recommends that new credit users think about the need for multiple credit cards and mentions that starting with just one credit card and utilizing it responsibly in order to develop a good credit history will do the job.

The approach should be to think about how responsibly one can use the credit available to him or her, rather than the amount of credit available.

7.      Avoid multiple credits and applications

Once you become eligible by starting with your first financial product, you will receive a string of desirable credit card and loan offers. Remember not to accept all of them—keep your credit history natural and healthy.

CIBIL suggests to first-time credit card users that one must think before getting multiple credit cards and use credit wisely.

Instead of applying for multiple products just for the sake of fast credit building, get credit according to your actual needs and repayment capabilities.

Credit building for a first-time credit score must be done gradually. Your aim must be to show your reliability and not to have the maximum number of accounts. This way you can avoid hard inquiries on your credit report.

8.      Pay Bills on Time

There are many different approaches to building a first-time credit score, but all of them will not serve any purpose if you frequently miss your repayment schedule.

Timely repayment must become an inevitable part of your financial behavior from the very start of your first credit account.

If you have any loan, remember the due date for EMI. If you have a credit card, keep yourself updated regarding the payment due date. Making calendar reminders or automatic payment arrangements will help you in organizing things as well.

CIBIL says that your repayment history is reflected in its credit report, and it must be clean and timely. Maintaining a timely repayment record protects you from defaults and late payments, and consistency builds and improves your CIBIL score.

The task is straightforward: Borrow as per your capability and repay on time.

9.      Keep your credit utilisation low

Receiving a credit card with a specific limit doesn't mean that you will max it out or use close to 100% of your credit. A credit utilisation ratio reflects how much of your credit limit you are using. An ideal or optimum higher limit for this number is 30%. Keeping it lower, for example, at 10%, is even better for management and improvement purposes.

The sensible approach for a first-time borrower is to make small, affordable purchases with gaps in between. Balances are recorded in the repayment history. Therefore, a credit management strategy for first-timers is to keep it easy and controlled to avoid any repayment mishaps and unnecessary financial pressure.

10.  Diversify your credit

Gradually and naturally add more financial products to your credit history, for example, loans and credit cards. Do not force a credit card or loan just for diversification. As a beginner, focus on timely repayment, responsible credit management, and affordability.

Conclusion

Building your credit for the first time doesn't have to be complicated. In fact, a first-time credit score can be a very simple and interesting process, since the rule of thumb is to keep things simple and secure.

A secured credit card is just an entry point. Once your first-ever credit report and first-time credit score are generated, you will be required to learn effective management strategies. You should be familiar with the intricacies of your personal credit report and profile to learn how to work with your individualised credit dynamics. Continue checking your credit report regularly to implement effective credit management techniques and behaviors.

 FAQs

1. How long does it take to generate your first-time CIBIL score?

It takes 3 to 6 months to generate your first-time CIBIL score and report. In the first month, your newly released data gets reported to the credit bureaus. Here, it shows NH or NA, and after a few months of activity, the bureaus have enough data points to calculate a CIBIL score.

2. How do you check if the lender reports to credit bureaus at all?

You can either check your credit report to see which account or lender is mentioned and which is not. Remember that not all lenders report to every bureau. Another method is contacting the lender directly through customer service or checking contract details.

3. What is the most common first-time credit score?

The most common first-time CIBIL score is likely to be around 600 or in the mid-600s.

4. Why is regular activity important after building the first-time credit score?

Inactivity can lead to closed accounts and a shorter credit history.

Regular activity, or at least activity with gaps, is important to maintain relevance for your credit information, reporting, and calculations. Otherwise, your score can stagnate and result in a dormant file.

5. What do I do after my first-time credit score is generated?

●       Pay on Time

●       Pay due balances in full

●       Regulate CUR.

●       Monitor and review

●       Limit new applications

●       Maintain account age and credit mix