Here’s how to build your credit score if you don’t have one

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Are you planning to take a loan from a lending institution to buy a home, a car or for education purposes? Even if you have a high-salaried job, the lender will surely check your credit score before deciding to extend the loan.

A credit score is provided to lenders by specified entities which collect data on credit behaviour of people. It is arrived at by assessing your past loan repayment record, your credit card repayment history, your loan application history, among other variables.

A credit score above 700 (out of maximum 900) is generally a must for being able to get a home loan. Low credit scores could mean either denial of loan or losing the ability to negotiate a better deal with the lender on the terms of the loan, including interest rates.

Here are a few steps you should take if you want to build a good credit score from scratch:

Obtain a credit card: Obtaining a credit card is not a big task anymore. Many banks offer you one. Do sign up for one and ensure that you use it in a prudent manner. Pay your entire bill on time. This will help you build your credit history over a period of time. If you do not pay your credit card bills or other loan EMIs on the due date your credit score is hit. Hence use credit wisely.

Secured credit card way: Banks may deny you a credit card if your monthly salary is lower than their internal threshold or if you do not have a stable job. But do not lose heart. You can open a fixed deposit with the bank and ask for a credit card against it, technically termed as secured credit card. They come with a credit limit well below your fixed deposit (FD) amount. If you fail to repay the credit card bill, then the bank takes over the fixed deposit. By using such a credit card in a prudent manner, you can build your credit history over a year or two.

Keep credit utilisation ratio low: Credit card holders often max out their credit cards. Avoid doing so. It is a sign of you being credit starved. Credit utilisation ratio – the ratio of credit used to credit limit on the card – should ideally be less than 30%. For example, if you hold a credit card with a limit of Rs 1 lakh, do not spend beyond Rs 30,000 per month. If you feel your credit limit is low and is coming in the way of usage, write to your bank and get the credit limit increased.

Avoid minimum payment trap: There are unavoidable situations when you tend to overswipe – be it festive season or a medical emergency. Do not get into the trap of paying a minimum amount of due and let it revolve. Instead get in touch with your bank and convert your outstanding into a loan. Choose a tenure that can help you service your loans stress-free.

Do not apply for too many loans: Once you get a credit card transaction history going, more banks will offer other loans and credit cards. Do not apply for everything that comes your way. Each time you apply for credit, your credit score gets checked by lenders. This gives the indication to lenders that you are credit hungry and a potential defaulter at a later date. Too many such inquiries will lead to a fall in credit score.

Do not stop old credit cards: Just because you are offered a credit card with more facilities, do not close old credit cards. Old loan or credit cards serviced regularly offer a long credit history. They talk about your credit discipline and make lenders comfortable.

Credit history and credit score are built over a period of time. You have to be disciplined to do it. You get to check your credit score once in a year at no cost. Check it once and notify mistakes if any to the lenders and credit bureaus. It also helps boost your credit score.