You will always need a solid credit history and credit score to get approved for a credit card, personal loan, or other types of borrowing. Building a credit history from the scratch can be difficult for those who do not have one. In this article, we will discuss about the importance of credit history and how to build one when you are about to start your credit journey.
Building credit may be a little challenging, but it isn't difficult once you know where to start from. Higher credit ratings are a little more difficult to come by, but we will help you how to achieve it. Before a bank or financial firm will lend you money, they will assess your creditworthiness. What they want to know is whether or not you will repay them. Your credit report reveals how you have handled credit in the past, allowing them to anticipate whether you will be able to repay your debts in the future.
Potential lenders or credit card companies cannot assess your creditworthiness if you do not have a credit history. As a result, your application may be rejected. Building a strong credit history might help you save money as well as get your credit applications approved. That's because having a good credit score increases your chances of being approved for credit at the best loan rates.
Let us first understand what a credit history is and why it is important for you to have one.
What is a Credit Score History?
Your credit score history, often known as your credit report, is a document that has all the details of your financial behaviour. It shows whether you pay your bills on time, how much debt you owe, how many times you have applied for credit, and whether you have ever missed a payment. Your credit report will go far further into your loan history, giving the lenders or financial institutions the prospect of examining how you have handled the funds that you have ever borrowed. If you have had trouble making timely payments, the report will reflect this, which may raise red flags with lenders. This is why having a solid credit history is so crucial. Why would a lender be willing to trust you with their money if you have a bad credit history?
How to Build a Credit Score History from the Scratch?
It might be difficult to establish credit when you are just starting to build your credit history. It's difficult to secure a loan or even a credit card if you don't have a credit history. But how are you going to demonstrate a track record of timely repayments if no one will lend you money in the first place?
Here are a few tips to help you get started with building your credit score history from the scratch:
1. Apply for a Secured Credit Card
If you're starting from the scratch, you will almost certainly have to start with a secured credit card. A secured card is backed by a cash deposit you pay up front, which is usually equal to your credit limit. The minimum and maximum deposit amounts vary by card. Secured credit cards are easy to get when you do not have a credit score history as they are issued against a security deposit or collateral. The security at most banks is generally in the form of a fixed deposit.
2. Avoid Applying for Multiple Credit Cards
Credit applications can result in a temporary decline in your score. Multiple applications have the potential to inflict considerable harm on the credit score you are trying to build. If possible, space out your applications by roughly six months, and do your research before applying for the best credit card as per your financial needs. Avoid applying for multiple credit cards at once, as this will make you appear credit-hungry to potential lenders or financial institutions.
3. Pay your EMIs on Time and in Full
Your credit score can be harmed by just one late or missed loan or credit card payment. Set up direct debits to ensure that you pay all of your bills on time. Your payment history is one of the most crucial factors impacting your credit score. Make an effort to set up a system to remind you when bills are due and to pay at least the minimum amount on time. Ensure you pay all your EMIs without defaulting on them.
4. Apply for a Loan or Unsecured Credit Card
Normally, it takes at least six months of consistent credit card usage to accumulate enough data for credit bureuas to issue a credit report. Build a strong credit history for a year to assure the credit card companies to offer you an unsecured credit card to use. You must switch from a secured to an unsecured credit card because a credit card comes with a lot of perks and also you do not have to offer any security or collateral when applying for it. Once you apply and get approved for an unsecured credit card, use the card regularly while maintaining a low credit utilisation ratio.
Obtaining initial credit is the most challenging aspect when it comes to build a credit score history. This can be accomplished with the help of a secured credit card or a secured loan. Try to consistently save a good portion of your income in your bank account as that might also help the lenders to assess your creditworthiness while assessing your application with no credit score history. Remember, it may take up to six months for your credit score to improve to the point where you can apply for unsecured form of loans. So, don't be discouraged if you don't notice any results right away. The reason for the delay is that information on new bank accounts or credit card payments can take a long time to reach the credit bureaus and then the same will get updated to your credit history in due time.