It can be confusing to apply for your first credit card or loan and be rejected because the lender cannot locate any documentation of you. The system claims you are ineligible even though you have never missed a payment. The explanation is straightforward: lenders use your credit history to evaluate you; if you have none, they have nothing to work with. Fortunately, this is fixable. This blog provides a step-by-step, straightforward explanation of how to build a credit score from scratch.
Please read our blog on: Personal Loan Application and CIBIL Score: What You Need to Know
What is a CIBIL score? Why does it matter?
A CIBIL score is a 3-digit number that ranges from 300 to 900. This score shows how responsibly you make your loan and credit card payments. For example, if you pay your EMIs and credit card bills on time, the chances of maintaining a good CIBIL score increase. But if you repeatedly miss EMIs or make late payments, your score may decrease. Now, why does it matter? When you go to a bank to get a unsecured personal loan, home loan, or credit card, the bank checks your CIBIL score. This helps the bank understand whether you will be able to repay the loan on time or not. Generally, a CIBIL score of 750 or above is considered good. Having a good score can increase your chances of loan approval and getting a lower interest rate. However, the bank also checks your income and existing loans.
Why do you have no CIBIL score yet?
People who have never taken a loan, never used a credit card, or have no credit history may not have a CIBIL score. Such people are called New to Credit (NTC) in the credit world. For example, suppose you have a friend who has never taken a personal loan or home loan and has never used a credit card. Then CIBIL will not have his repayment history, based on which his score can be calculated.
How to build a credit score from scratch: step-by-step
Step-by-Step Process for How to Build a Credit Score from Scratch:
Step 1: First, Check Your CIBIL Score
Visit the CIBIL website and check your credit report. If you have no credit history, your score may show NA or NH. This does not mean a bad score. According to RBI rules, eligible individuals can get one free full credit report every calendar year.
Step 2: Get a Secured Credit Card Against an FD
If a normal credit card is not getting approved, try to get a secured credit card by making a fixed deposit (FD) in a bank. Suppose you make an FD of ₹10,000. The bank may give you a credit limit against it according to its policy. Confirm that the card's payment history is reported to CIBIL.
Step 3: Make Small Purchases Using Your Credit Card
Now, shop for Rs. 500–Rs. 1,000 every month using your credit card. Such as groceries, mobile recharge, or petrol. Use only a small portion of your credit limit. For example, using Rs. 1,000 out of a Rs. 10,000 limit is 10% utilization.
Step 4: Pay the Full Bill on Time Every Month
Suppose your credit card bill is ₹800 and the due date is 20 November. Then pay the full Rs. 800 before 20 November. Do not make a habit of paying only the minimum due. Paying the full amount on time helps establish a positive repayment history.
Step 5: Let Your Credit History Grow
Continue using your card and paying the bill on time. Your credit history may be established within a few months, but there is no guaranteed time for when your first numerical CIBIL score will be generated. It depends on the bank's reporting and CIBIL's scoring requirements.
Step 6: Avoid Unnecessary Loan Applications
Do not take a personal loan just to build your CIBIL score. Applying for too many credit cards or loans at the same time can increase hard inquiries, which may negatively affect your score.
How to establish credit for the first time: smart habits to follow
Step 1: Check Your Current CIBIL Score
First, visit the official CIBIL website and check your credit report.
Website: www.cibil.com
If your score shows NA or NH, it may mean that your credit history is not sufficient yet.
If your score is already available, check your payment history and outstanding loans in the report.
Step 2: Start with a Secured Credit Card
If you do not have a credit history, an FD-backed secured credit card can be a good option.
Example: You make an FD of ₹10,000 in a bank, and the bank provides you with a credit card against it.
The benefit is that you can start establishing your credit history without taking a large loan. Before getting the card, confirm that the bank reports payment details to CIBIL.
Step 3: Use Your Credit Card Less
Credit card usage | Amount |
Total credit card limit | Rs.10,000 |
Monthly spending | Rs. 1000 |
Credit utilization | 10% |
Suppose your credit card limit is ₹10,000. Try to keep your credit utilization below 30%. Keeping it around 10% can be a conservative target, but no fixed percentage guarantees a good score.
Step 4: Make Full Payments Every Month
The most important rule for building a good credit score is to make every payment on time. If your credit card bill is ₹1,000, pay the full ₹1,000 before the due date. Paying only the minimum amount may result in interest charges. Missing payments can damage your credit history.
Step 5: Do Not Apply for Too Many Loans at Once
If you are building credit for the first time, do not repeatedly apply for personal loans or credit cards. Too many hard inquiries can negatively affect your credit profile.
Step 6: Let Your Credit History Get Older
After getting a credit card, continue using it responsibly. Developing a good credit history takes time. It may take a few months for a numerical CIBIL score to appear after opening a credit account.
Step 7: Check Your Credit Report Regularly
You can check your credit report every 2–3 months. If you find incorrect loan entries, missed payments, or unknown accounts, raise a dispute. According to RBI rules, eligible individuals can get one free full credit report every calendar year.
Tips to maintain a good CIBIL score
1. Pay EMI and Credit Card Bills on Time
Always pay your loan EMI and credit card bill before the due date. Even one missed payment can negatively affect your credit history. You can set up auto-debit or payment reminders to avoid missing payments.
2. Keep Your Credit Utilization Ratio Low
Do not use too much of your available credit card limit. Generally, keeping credit utilization below 30% is a useful guideline. Example: If your credit card limit is ₹1,00,000, try to keep your reported outstanding balance below ₹30,000. The lower the utilization, the easier it may be to manage your credit profile.
3. Do Not Apply for Multiple Loans at Once
If you repeatedly apply for personal loans or credit cards, lenders may make multiple hard inquiries on your credit report. Too many inquiries in a short period can negatively affect your CIBIL score.
4. Do Not Close Old Credit Cards Without a Reason
If you have an old credit card and it does not have an annual fee, keeping it active can be beneficial. Old credit accounts can help maintain the length of your credit history. However, if the card has high fees or there is a risk of unnecessary spending, it is not necessary to keep the card active just for your score.
5. Check Your Credit Report Regularly
Check your CIBIL report periodically and see if there are any incorrect payment entries, unknown loan accounts, or outstanding balances. Checking your own CIBIL score is a soft enquiry, which does not reduce your score.
6. Try to Avoid Loan Settlement
If you settle a loan without paying the full outstanding amount, a "settled" status may appear on your credit report. This can create problems with future loan approvals. If you are facing difficulty in repayment, discuss repayment options with the lender.
FAQs
Can I build my CIBIL score without taking a loan?
Yes, you can build your CIBIL score without taking a traditional loan. A credit card, including an FD-backed secured credit card, can help establish your credit history if the issuer reports the account to CIBIL
Is a zero or no CIBIL score bad?
No, having no CIBIL score does not necessarily mean you have bad credit. It may indicate insufficient credit history, no recent credit activity, or no independently reported credit account.
What is the good CIBIL score?
A score of more than 700 is considered to be good.
Does checking my own CIBIL reduce my CIBIL score?
No, it's not like that; checking your own CIBIL doesn't reduce your score.