A great man once said that the greatest enemy of knowledge is not ignorance; it is the illusion of knowledge. Like some people live in an illusion that no credit history will keep them in excellent credit score range. While it may seem logical to them as they never took a loan from a bank or other financial institutions but just like other things this topic too has a different aspect, which we will explore as we go further.
To start with, let’s first understand a bit about credit score and a little about topics that fall in its periphery. Almost everyone has a bank account. The banks not only provide banking services to its customers but also financial products such as loans and credit cards. Suppose you take a loan or credit card from a bank or any other lender. The lender will give you a loan and periodically send your credit information to credit information companies (CIC) such as CIBIL and Experian. The CICs or credit bureaus collect your credit information and on its basis create your credit report to evaluate your credit score. And again when you go to a bank or a lender to avail loan or credit card, the lender on the basis of your credit report will lend you money.
Credit score is an important factor that helps lender evaluate whether the loan applicant will pay the loan amount on time or not. A poor credit score shows that the loan applicant is financially unstable and not likely to repay loan amount on time, whereas a good credit score reflects that the loan applicant is likely to repay the loan amount in time. To build a good credit score, loan applicant must have a good credit repayment history, which means that they must not have loan defaults in their name. The other factors that can negatively affect your credit score are listed as follows:
- Poor credit repayment history
- High credit utilization limit
- Multiple loan application
- High percentage of unsecured loans
- Frequent requests for a higher credit limit
- Faulty information on your credit report
Besides the points, there is another point that may not harm your credit score but will also do no good when required the most, i.e. during loan application – No Credit History.
What difference does NO Credit History makes?
Some people think that no credit history will help them get loans quickly. However, having no credit history will not keep you in an excellent credit score range. This in turn will not be helpful when you apply for a loan as the lender will still be sceptical about whether you will be able to repay them the loan amount on time or not.
Having no credit history means that the loan applicant has no experience with credit in the past; this in turn makes them a risky prospect. By building a good credit history, you build trust with the lenders to get loans quickly and easily.
What are the consequences of having No Credit History?
Having no credit history will affect you in the following ways:
1. Problem in Getting Best Deals on Loans
Since you don’t have a credit history, therefore, the lenders don’t know enough about you to decide whether to lend you loan or not. This in turn makes access to any type of credit difficult for the loan applicants. There will be lender willing to lend you loan but you will not get favourable deals on it. In addition, the loan will have more stringent loan policies.
2. Higher Rate of Interest
The Indian banks are on their way to consider credit score of the loan applicants for setting the rate of interest on loans. The Bank of Baroda is the pioneer to charge differential rates depending on the credit score. If this thing becomes a norm, soon having no credit history will deprive you from availing loans at lower rate of interests.
3. Fewer Benefits on Credit Cards
People with no credit history get fewer benefits as compared to those with a good credit history. There are various banks and credit card companies that every now and then offer great credit card offers and attractive reward points program, EMI offers and other discounts and cashback offers on purchases made using credit card. These offers, however, are available to only those with good credit scores. In such a case, having no credit history means that these offers will not be available to you.
4. No Pre-approved Loan
Many banks offer pre-approved loans and credit cards offers on the basis of your credit score. Generally, these loans are customized and have less processing time as compared to other loans. Without a credit history, it is next to impossible to get a pre-approved loan from any lender. Therefore, it is important to build a good credit history.
5. Less Credit Limit
Having no credit history also means that you will have a less credit limit on your credit card. No matter how much you earn, having high income and/or zero credit history will not help you get a higher credit limit on your credit card.
Why is it important to build a credit history?
We don’t know what future holds for us. All we can do is to prepare ourselves for the worst. You may not feel the need to build your credit history now but, god forbids, if you ever need it in future, you must be prepared for it. When in financial trouble or a medical emergency, loans can be of great help. If you don’t have a credit history, it will be tough for you to get loan approved. Your credit history can help you get loans instantly when in need. With a good credit history, you can build your credit score, which in turn will help you increase the credit limit of your credit card. The increaseed credit limit on your credit card means that you can use large amount as a loan when in emergency.
How to Build a Credit Score If You Don’t Have One?
To build a credit score from zero, here’s what you can do:
- Apply for a credit card.
- Take loan of an amount that you can repay on time.
- Keep your credit-utilization ratio low.
- Pay loan EMIs on time.
- Check your credit report periodically for any errors.
- Keep credit accounts open for as long as possible to build the length of credit history.
- Avoid opening too many credit accounts at once.
- Don’t apply for loans in a short period.