Establishing a credit history without having any credit on record, and getting credit without having any credit on record is a seemingly vicious circle with no solution in sight. However, the good news is that this is not so, and you can start to build a credit history slowly but steadily. Further, this history needs necessarily to be reported to credit information companies, or credit bureaus for your diligence and efforts to bear fruit. Following from this, to get a credit solution without any credit history may seem tough, but keep in mind that it is not impossible. All you need is a good place to start.
What is credit history?
Simply put, credit history is nothing but details about your borrowings or debt (whether credit cards or loans) that are made available in the form of a credit information report. Your history takes into account the number and type of loan accounts you have held, and the length of each account. It also tracks in detail your payment behaviour – whether timely payments have been made, or whether there are any delays and/ or payment defaults on any or all of the accounts.
Why is credit history important?
Without credit history it gets difficult for a person to be offered a line of credit by a financial institution or lender. This is because with nothing to go by, a lender is unable to determine the creditworthiness of the customer – what is the likelihood of the loan going ‘bad’, i.e. the customer not making a payment. In this case, the risk to the lender is high, and that is something most lenders would be unwilling to take, as it can mean a loss on their books.
Globally – as well as in India – therefore credit history has been gaining importance and is applied not only in the financial services sector but also across other service industries including telecom and insurance. Employers too conduct credit report checks as part of the pre-employment process.
How can one improve credit score?
To improve credit score, one need to start building credit history, a good move would be to apply for a credit card and start making timely payments. This will over time establish your repayment behaviour and will serve as a solid beginning to your credit journey.
Secured credit cards are another good option by which to build credit history. With this type of card, a bank asks you to maintain a fixed deposit with them, which is then extended as credit limit on your card. While the interest rates may be slightly higher than normal, once you start making payments you credit history starts to get established. Ensure that you spend only what you can comfortably repay on the card.
How about considering a collateralised or secure loan? For example, even if it is a personal loan you wish to apply for, offer to provide your home as collateral security. While this may not seem to be the optimal solution, it is a fair way to begin. Financial institutions are likely to look favourably at this credit solution on a case-to-case basis.
Another thing to keep in mind is that while a credit solution may be extended to you, it is likely to come at a higher cost than it would for someone with a ‘good’ established history. For example, the home loan interest rates would come to you at may be higher as compared to the standard rate. Further, you may need to put down a larger down payment than you would have had to with an existing credit history.
In spite of these concerted efforts, if you still have difficulty in getting a credit solution to meet your requirements, you could consider applying jointly (as second applicant) on a loan. Here, even though you may not be the primary borrower, but once you and the co-applicant successfully repay the loan, your credit history is established.
Here’s the silver lining – once you have been through some or all these options and having found your credit solution, you will start building credit history and any subsequent loan or card that you apply for, will be easier to get.