The credit score represents the creditworthiness of the borrower. It indicates whether or not they are capable of repaying their debt. A lender, bank, or financial institution will always check the credit history before approving a loan. A credit score ranges between 300 and 900. The higher the score, the greater the chance of getting a loan approved. 

In general, good credit scores are associated with timely loan repayment. But what about people who have never taken out a loan? If the lender checks their CIBIL score, it will come up with an NH (No Hit). The unavailability of a credit score may discourage some lenders from approving loans. So here’s how to improve credit history. 

Importance of credit history

Before we talk about ways to build a credit history, here are some benefits of building a credit score:

  • Easy approval of loans 
  • Eligibility for credit cards with better rewards and benefits
  • Higher loan amount or credit card limits
  • Better repayment terms 
  • Attractive Interest rates

How to build a credit history?

Building a credit score is not an overnight process. It takes time. However, one can do the following things to build or improve their CIBIL.

Purchases on EMIs

Post-pandemic income and liquidity constraints have prompted consumers to prefer to purchase products in instalments, which can improve their credit score. How does it do that?

Today, lots of consumers store offer the option of EMIs even online. If a person wants to buy a headphone on Amazon, they can choose the EMIs option for 3 or 6 or 12 months. If they pay their instalment on time, their credit score increases. 

Get a Co-signor

If the borrowers have a zero or low credit score, lenders won’t be confident about their worthiness. This is where a co-signor can help. A co-signor agrees to take equal responsibility for the repayment of the loan. As a result, borrowers who may not have a credit score can choose a co-signer with a good credit history, which will help them obtain favourable credit terms. 

Start with a low-limit credit card

Young professionals may not have the necessary credit or the strong financials to get the desired loan. However, they can build their credit by applying for a low-limit credit card from their banks. The salary will assure banks of a stable income. But, remember to keep the credit utilisation ratio below 30%. A higher percentage shows credit-hungry behaviour, which is not likeable for Credit Bureaus.  

Pay the credit card bills on time

Whether the universal acceptance, instant access to funds or additional rewards, credit cards are gaining popularity worldwide. There is one more benefit to owning one. It is one of the simplest ways to build a credit score. Simply paying the credit card monthly bill on time improves the CIBIL score.

Avoid applying for multiple cards

Credit cards offer numerous benefits. However, applying for multiple cards within a short time can have a negative impact. Before approving a loan, lenders enquire about the borrower with the Credit Bureau. More credit card applications, more hard enquiries by lenders. If there are multiple hard enquiries of a borrower, it reduces their credit score by a few points.

Furthermore, avoid closing the old credit card accounts. When a person owns a credit card for a long time and has been paying the bills on time, it reflects positively on his/her creditworthiness.  

Opt for a secured card

Loan approval is primarily based on a borrower’s ability to repay. However, what if the borrower offers some form of security when they don’t have a credit history for review? 

Secured credit cards operate similarly to other types of credit cards, except requiring an equivalent cash deposit to the card issuer. A secured card acts as collateral if the borrower defaults on repayment of the credit card bill. Now, credit card issuers are required to report all secured card transactions to the credit bureau. It has a positive effect on the credit score. However, review the bank’s fees before applying for a secured card. Usually, secured cards have lower credit card limits and higher fees in comparison to unsecured cards. 

Final words

A popular quote says,” To get credit, you need to get credit”. Follow these tips to build a good credit score. Also, ensure you review it periodically. Occasionally, clerical errors or technical errors can hamper your credit score. Thus, try and fetch the credit information from Credit Bureaus at least once a year.  In case of doubts, you can seek assistance from experts like Tata Capital. In addition to helping you find the best personal loan from Tata Capital, including EMI options according to your needs, we allow you to check your credit score online as well. 

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