What’s in the blog?
This blog is about building a credit score from scratch. This beginner-friendly blog talks about practical baby steps to build credit history without getting into the credit trap.
Table of Contents
Honestly speaking, stepping into adulthood where you are the decision-maker for your money matters is a maze of opinions and confusion.
Mummy says loans are bad. Papa dreams you’ll buy your own home someday, which, by the way, needs a home loan. Friends flaunt their credit cards, showing you how ‘cool’ life can be when you can swipe now and think later.
And then there’s Google, throwing around big terms like credit score, CIBIL, EMI, debt trap…
What does a person even do?
I’ve been there, done that. And that’s why I’m writing this blog not just as a finance professional, but as someone who started out just like you: New earning, big dreams, and a whole lot of confusion.
This guide will help you cut through the noise and build a solid credit history smartly, safely, and stress-free.
Why is Credit History Important?
Let’s start from the very beginning. Why in the first place do you need to have a credit history?
In the simplest terms, credit history is your financial reputation. It tells banks, NBFCs, and credit card companies how trustworthy you are with money. Whenever you need to take a loan for any purpose, it is your credit history that opens or shuts the door for you.
Without a credit score, you are invisible in the finance industry. No one knows you, no one trusts you.
MoneyAnna Advice: Even if you don’t have any requirement or intention to take a loan, make sure you build a good credit score.
How to Build Credit Score From Scratch: Step-by-Step Guide
Building a good CIBIL Score type terminology might make you feel that it’s a complicated thing. But, believe me, if you get the right guidance, this is actually very easy. So, don’t let the big terminologies confuse you. Let’s see how easily we can do this.
Buy Something on EMI
No, I’m not asking you to buy an iPhone or Harley-Davidson. Look around and see if you need to buy something. Maybe your mother is already asking to buy a washing machine. Your father might need a phone. You might already have cash at your disposal to buy these items, but you should intentionally choose to buy them on no-cost EMI.
The option of no-cost EMI is easily available on platforms like Amazon or Flipkart that you already use. There’s no additional paperwork required here. This is the easiest way to start building your credit score.
Choose Financing Option if You Take the Course
If you are someone who keeps enrolling in courses to upgrade your knowledge, you can use them to upgrade your credit score, too. While enrolling for any such courses, make sure you ask the providers if they have any financing options.
In many cases, this is not shared upfront, but if you ask, these institutions have tie-ups with different NBFCs to provide no-cost EMIs on the tuition fee. This is again a simple and decent way to start creating your credit footprint.
Get a Beginner-Friendly Credit Card
I completely understand if you are skeptical about taking a credit. But trust me, it’s not the tool but how you use it that determines the outcome. And when I’m suggesting you take a credit card, I’ll definitely tell you how not to get into the trap.
Take a low-limit, say 10k or 25k, credit card. Use it to buy things you would anyway purchase, for example, your groceries, fuel, OTT subscriptions, etc. And make sure you pay the bill before the due date.
Monitor Your Credit Report Regularly
To make sure your credit score is on track, make sure you keep checking the reports regularly. You can use free tools like CIBIL, PaisaBazaar, or BankBazar etc., to check your credit score every 6 months.
These reports will help you spot errors and track your growth. At this point, you may want to have some guidance or a helping hand to plan things strategically. For that, you can anytime reach out to the team MoneyAnna.
How to Ensure You Don’t Fall into a Credit Trap
You see how easy it is to build your credit score. Now, let’s discuss some precautionary steps, as I promised earlier, to ensure you don’t fall off the slippery slope of a credit trap while trying to build your credit score.
Never Max Out Your Credit Limit
The biggest mistake a credit card holder makes is utilizing the credit limit to the fullest. Never do that. If your credit card limit is, say, 25k, try to limit your spending to 30%, i.e. 7-8k. Tell your mind that this is the original limit you have on your credit card.
Pay Before the Deadline
Every credit card gives you a time limit for making the repayment. Many people plan to pay their dues exactly on the last date, and then an accidental miss makes them regret their decision. Even a 1-day delay on repayment can prove to be a big mistake. So, make it a habit to pay off everything before the deadline.
Remember, your repayment behaviour defines 70-80% of your credit score.
Insightful Experience
Today, I won’t share any client experience, rather, I’ll share my personal experience… the story of when I started with low earnings and high confusion.
In 2012, I could get a home loan at 12% interest after lots of effort. I was self-employed and had no significant credit history.
It was tough, but I ensured that I made all the repayments on time. Within a few years, I was able to get that same loan refinanced at a 9% interest rate. By then, I had understood the importance of a strong credit score, so I started with two small-limit credit cards (25k and 45k each).
I made sure not to max out on my limits and kept repaying consistently. Over 5 years, I grew my limits to 3.5 lakhs and 5 lakhs on my cards. This isn’t about how much credit I need or want, it’s about how much credit-worthy the market believes I am. And, this is about financial discipline.
My Take
Building a credit score is not about taking a loan (that can be a separate topic of discussion), it’s about making yourself ‘credit-worthy’. The entire exercise of creating a credit history and maintaining a good score is about placing yourself in a position where you can get credit if and when you need it.
If you need any support or hand-holding in building your creditworthiness or if you need clarification on any such doubt, feel free to reach out.
Frequently asked questions (FAQ)
The fastest way to build credit history from scratch is to make small purchases on credit and then pay them off quickly. On-time and early payments build your credibility in the eyes of lenders.
Your CIBIL score is affected by multiple factors. You should definitely pay off your outstanding debts on or before the payment deadlines. In addition to this, you should try to minimize your credit utilization ratio. And try not to put multiple loan applications in a shorter period of time.
Practically speaking, having no credit history is not really a good thing in today’s time. Without a credit history, you don’t have creditworthiness. So, even if you intend not to take a loan, you should build a credit history that makes you creditworthy.
You can’t delete your credit history where you messed up earlier, but you can definitely work on improving your image in the eyes of credit bureaus. Start adopting good financial behaviour right now. If your credit report is a complete mess, you might want to talk to an expert and get specific advice for your unique case.
Building a good credit score can take anywhere between 6 months and 1 year, depending on how strategically you are moving towards this goal.
