You are following good advice if you are testing your credit to see where you stand. But if you've had no credit experience, you may not have a credit score at all. Nonetheless, don't worry — you have done nothing wrong and you are not alone. It commonly happens to people, especially young adults, who have not developed credit histories. It can also happen if you've had credit long ago but not in the last several years.
A credit score below 650 probably means that you couldn’t manage your debts, but having no score does not mean that. It means that your future lenders simply don't have a basis to evaluate your creditworthiness on. If you were to have any kind of score in the past, you'd have to have a debt from a regulated lending institution such as a bank or NBFC. This may sound counter intuitive, but you need debt to get a good score.
What is the impact of not having credit score?
It’s much harder to access high-quality or premium credit products without a credit score. For example, it’s difficult to get premium credit cards. Credit cards have now become an important financial resource. In addition to providing you with easy credit, competitive loyalty points programme, discounts, cashback deals and offers on EMI on credit card purchases also come with them.
Without a credit score, you may face challenges in getting the best loan offers. In case your credit score is negative, it means you have no credit history. Without a credit score, banks do not have data to determine how you’ve used credit in the past, which heightens the risks perceived by them. While you may still be able to get loans, you’ll probably have to do so at higher interest rates and processing fees and against stricter terms and conditions applicable on your loan.
Lastly, without a credit history, you may not get offers on pre-approved credit cards and loans. Banks offer these based on your credit score and your customer relationship with them. Such offers are generally tailor-made and have a lower processing fee than regular loans. A non-existent credit score will not fetch you these offers.
How can you develop a credit score?
The ideal way for people who don't need any type of loan to build a good credit score is to get a credit card. For starters, apply for a credit card from the bank where you have your salary or savings account.
In case you do not get a regular credit card from your bank, you can go for a secured credit card against a fixed deposit, which is treated as collateral. You will earn interest on this deposit amount. And if you use the credit card and keep paying off your dues in a timely manner, you will be on your way to developing a good credit score.
Students and housewives with no regular income may apply for add-on credit cards if they can’t qualify for regular credit cards. Add-on cards are provided to eligible family members of credit card holders, and these cards have similar benefits and features as the primary credit cards as well as a shared spending limit. Do note that add-on cards will give you a credit line but not help in developing your credit score. The credit score of only the primary card holder is impacted by the actions of the add-on users.
Keeping a track of your credit score
It is of utmost importance that you keep a track of your credit score once you have started building it. A poor credit score will not change and become amazing overnight. You will need to be dedicated and committed towards improving your score, and the change will only reflect over the course of time. Thus, if you keep checking your score once every month, you will be able to understand whether your repayment habits are affecting your credit score in a positive way.
Reasons why you should check credit score regularly
It is good to know your current financial status before applying for a loan or a credit card. This way you’ll not face the shock of knowing that your credit score is poor during a loan application. Keeping track of your score would also help you identify areas where your credit habits need work. For example, your credit utilisation ratio may be high and thus hurting your score. Your credit report may even have incorrect personal information or credit account details. You must raise a dispute in such a case before the errors wreck your score. Lastly, you can be victim of fraud that can lead to a drop in your score. These problems can only be noticed if you access your credit report frequently.
Your credit score is a measure of ability to repay your debts. Banks would rather give credit to a person who has a fantastic track record of repayment than someone who has a good salary but a bad history of repayment.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans, credit trackers, credit cards, and more.