Personal loans are a quick way to cover large and sometimes unforeseen expenses. Borrowers apply for personal loans for various reasons such as wedding expenses, medical emergencies, home renovations or an educational fee requirement. When an applicant applies for a loan, like any other form of credit, a lender will typically check the applicant’s credit worthiness by looking at the credit history and credit score.
What if you have never taken a loan or don’t have a credit card? This means you probably don’t have any credit history.
What is Credit History?
Credit history is the record of loans taken and repaid by a person. Every time you avail of any credit like a loan or use your credit card, a record of your transactions is maintained. This includes the type of loan/ credit you took, the number of repayments made, whether the repayments were made on time etc. It is essentially a record of all the details on how you have managed your credit. Whether it is how many credit cards you have, what type of loans have you taken or whether you pay your bills on time.
Companies collect information about your credit cards, transactions, bill payments and loans from the credit bureaus. This information is then put together to create your credit report. It is this record that is verified and looked at when you apply for a loan.
What if one is in need of a loan but has no credit history? Fret not! The good news is there are still options. While maintaining a healthy credit score is important, not having a credit history or credit score is not necessarily a deterrent in getting a loan.
What does it mean to have no credit history?
When a person applies for a loan, lenders check their history to find out previous loan repayments records to assess whether the applicant is capable of making loan repayments. This helps the lender to gauge the applicant’s eligibility.
Having no credit history means that a person has never been in the formal credit system before. It means that their day to day transactions are done in cash.
Although having no credit history makes applying for a loan difficult, it is not impossible. Thanks to developments in technology and alternate data available, lenders are no longer reliant on traditional lending practices. However, it is in an individual’s best interest to use digital banking to do every day transactions and build a credit history.
Here are some important steps one can take to build credit history:
- Open a bank account if you don’t already have one.
- Pay your utility and household bills on time from your bank account.
- Open an FD in a bank.
- Apply for a credit card once eligible.
- Use your credit card judiciously but regularly.
- Make timely and full payments on your credit card.
Why is Credit History Important?
Having a credit history makes it easier for an individual to get a loan or credit card. The longer your credit history, the more accurate lenders can be in determining the level of risk they take on when lending to you.
Be patient. Credit history is not built in a day. Make sure you are regular with your payments and pay the total amount due every month before the due date. With perseverance and discipline, it is possible to build and maintain a healthy credit score. If you wish to build and have a good credit score, make sure you use credit responsibly and appropriately.