Your credit score is derived from your credit history. And your credit history is based on how you have managed your credits in the past. What if you have never had any kind of credit card or loans? How can one build or improve a credit score without a credit history? Here is how.
Your credit score is a 3-digit number, ranging from 300 to 900, that denotes your credibility and risk rating to the lender. They lend you a loan or approve your credit card application based on this number. Higher the credit score, better are your chances of getting loans with low interest rate and getting credit cards with high credit limit.
But what about people who are new to this finance world, young individuals who have just started earning, or someone with no prior credit history? They have a few simple options to build their credit score too.
- Get a secured credit card – A secured credit card is issued by a bank against an FD deposit you hold with the bank. The credit limit is based on the FD amount. This is a great way for you to start your credit journey. This lets you open your ledger with a credit bureau and carefully build your credit. Your credit score is based on how you spend your credit limit and how good you are with the repayments. So be careful not to overuse your credit card (experts suggest a credit utilization ratio of 30% or lower), and also pay the bills on time every time. This is one of the best ways to start building your credit.
Secured credit cards will eventually help you build credit faster because your information is frequently sent to credit bureaus. Several credit card providers offer you information regarding your credit card balance and payment every month. As a result, if you make one or two purchases per month and then pay them off, your credit history will reflect this.
You can also choose from a variety of ‘Student Credit Cards,’ which are intended exclusively for students and young professionals. This is a fantastic place to start if you want to start building credit at an early age.
- Get an add-on card – You can become a credit card holder by getting an add-on card based on your parents, spouse or siblings’ credit card. This is another way of getting a credit card and starting to build your credit history. As an add-on credit card holder, the primary credit card holder can decide how much credit limit to issue to your card. There is some control you get there. But the important thing to remember here is that, if you don’t pay the bills on time or have a high credit utilization ratio, the primary card holder will also be affected. So you need to be careful on how you use the add-on card to build your credit.
If you want a credit card or a loan, the lender will want to see your credit score, which you won’t be able to get if you don’t have any credit to begin with. The lending world’s assumption is that “you need credit to get credit,” which makes life difficult for many qualified borrowers.
These are the elements that go into calculating your credit score –
- Payment History
- Credit and loans you owe to lenders
- Length of your credit history
- New credits you have applied in the recent past
- The types of credits and loan types you hold
Financial discipline is critical for someone who is establishing credit from the ground up. To ensure that you make regular loan repayments, you must carefully organize your monthly finances. Anyone can build a healthy credit score by being fiscally responsible.