How To Build Credit From Scratch

Most of us would be confused if we wanted to know the basics of how to build credit because we may never have taken a loan nor ever had a credit card. But the process can be done even if you have one. This guide is for beginners who need help understanding where to start.

Key Takeaways

• Start with a secured credit card against fixed deposit or a small credit builder loan to create history.
• Always pay the full credit card or loan amount on time every single month without fail.
• Keep your credit use under thirty percent of the limit for better score growth.
• Check free reports from all four credit companies once a year to track progress.
• The first score comes in about six months and a strong score needs twelve to twenty-four months.

What Does Building Credit Mean?

Credit can be defined as a representation of how good we are at handling our debts. Whenever we apply for a loan or a credit card and start paying off these loans/credit cards, our payments are being tracked over a period of a few months which becomes our Credit History.

On the basis of our Credit History, a 3-digit score (generally ranging between 300 to 900) is generated for us. This score represents our probability of making timely repayments on any credit facility offered to us by lenders. If someone doesn’t have a record then he won’t have a credit score either.

So if you want to start creating your credit, you need to get your very first credit product and then manage them properly.

Importance of Good Credit History

A good credit history helps in many ways. Banks and lenders look at it before giving personal loans, home loans, car loans, or cards with higher limits. People who have a good history often get lower interest rates and save money over time. Getting approval also becomes quicker and easier. Sometimes a strong record even helps when you want to rent a house or for some job checks. If the history is weak or missing then interest rates can be higher or you may get rejected. Making good habits early helps you avoid these problems later when you need credit.

Can You Build Credit Without a Credit Score?

Yes, you can. Having no score is normal for students, new graduates or anyone who has never borrowed money. You start by taking a product (like a secured credit card) that reports your payments. After a few months of regular use, a score gets created. Choose products that are made for people with no history and use them properly. You do not need a score to begin. The Reserve Bank of India has said that banks should not say no to first time borrowers only because they have no credit history.

Check If You Already Have a Credit Record

Before you start anything new, check if you already have some record. Sometimes an old loan or a co-signed account can make a thin file. There are exactly four official credit information companies. They are TransUnion CIBIL, Experian, Equifax and CRIF High Mark. As per Reserve Bank of India rules, you can get one free full credit report from each of them every year. This is also how to get a credit score for free once a year from each company.

Go to their official websites. Put your PAN, name, date of birth and mobile number. Check the OTP they send and download the report. Lenders do not send information to the same company always, so checking all four reports is helpful. Look at every account carefully. If you think something is wrong, write it down so you can take action later. It will help you understand the situation better and know what to do next.

Get A Secured Credit Card With A Deposit

This is one of the best ways to start building your CIBIL score​. You keep a fixed deposit with a bank. The bank then gives you a credit card linked to that deposit. The limit is usually 80 to 90 percent of the FD amount. Some banks even give up to 100 percent. Minimum deposit often starts from a few thousand rupees but the exact amount is different for each bank. Your FD continues to earn interest while it works as security. If you do not pay the card bill the bank can take the money from the deposit. That is why approval is easier even if you have no history.

After you get the card, use it for one or two small things every month like groceries or a regular bill. Pay the full amount written on the statement before the due date. Do this every single month. After about six months of clean payments the details get reported and a CIBIL score usually comes. Keep using the card lightly. Do not leave it unused.

Try A Credit Builder Loan

Some lenders give small loans only to help people make a payment history. You apply for a small amount. You may need basic KYC and some income proof. You do not get a big amount to spend at once. Instead, you pay fixed monthly amounts for a short time, usually six to twelve months. Every payment you make on time gets reported. In some of these loans the money stays locked and comes to you only after you finish all payments. This makes a good record of regular repayment. Pick a product where reporting is clear and the full cost is easy to understand before you take it.

Pay Every Bill On Time

Payment history is the most important part of your score. Even one late payment can create a problem that stays for years, especially when your file is new. Set auto pay for the full amount on any credit card or loan. Or put reminders on your phone a few days before the due date. Treat credit bills the same way you treat rent or electricity. Most utility and rent payments do not get reported by themselves. But the habit of never missing any payment builds the discipline you need for products that do report.

Keep Your Credit Utilization Low

Credit utilisation means the percentage of your credit that you are using. For example, if you have a credit limit of say Rs 20,000 but your dues amount to Rs 6,000 as per the recent statement, your credit utilisation would be 30%. Creditors prefer this ratio to be under 30%. Even better if you can bring it down to 10-20%. A simple way of doing this would be to not spend beyond a certain amount and pay off such bills before the statement date. High credit utilisation may bring your score down considerably, even if you pay on time.

Avoid Applying for Too Many Loans

Every time you apply for a new loan or card the lender checks your record. If many lenders check your record in a short time, they think you may have money problems and see you as risky. Wait at least a few months between applications. Apply only when you really need something and when your current accounts already show a few months of good history. One product that you manage well is better than three applications that do not work.

Common Mistakes to Avoid

Avoid these mistakes for a better start:

• Missing even one payment on a new account
• Using most or all of the available credit limit
• Applying for several products in the same month