New to Credit (NTC)

Table of Contents

Availing credit for the first time can be quite cumbersome especially since one does not have a history of borrowing. Without a credit history, it is difficult for a borrower to qualify for any form of credit such as a personal loan, credit card or even a mortgage, as lenders typically check an individual’s credit track record with a Credit Information Company (CIC) and prefer to lend to people with a good credit history and credit score.

Checklist for New to Credit Loans

If you are planning on taking a personal loan for the first time, the following are a few things you must keep in mind:

1. Choose the right Lender

Considering the number of banks and NBFCs offering personal loans at attractive terms, choosing the right lender takes a lot of research and comparison. Lenders keep spamming people with calls and text messages, offering loans and other financial products and services like credit cards. It is important to refrain from falling for these calls and text messages. If you really want to take a personal loan, go online and compare various options in order to make an informed decision. There are several third-party sites such as where you can compare and apply with ease.

2. Check the Fees and Charges

There are certain fees and charges that are applicable to personal loans, such as processing fees, foreclosure fees, etc. Look for these fees and charges in the loan document or on the lender’s website as doing so will ensure that you do not end up paying towards these charges later on.

3. Keep your Documents ready

When you apply for a personal loan, you will be asked to submit a few documents for verification purposes. These documents include address proof, ID proof, income proof, bank statements, etc. Keep these documents handy as it will make the application process smoother and hassle-free.

4. Don’t fall for 0% EMI Schemes

Lenders are never short of tricks up their sleeves with their offerings. One such ploy is the 0% EMI scheme which makes borrowers believes that they are getting the loan for free and that they only have to repay as much as they borrow. These schemes, however, come with high processing fees, which means that you will be paying more towards these charges than you would towards the interest component of a regular loan.

5. Plan for repayment in Advance

Most lenders have their own EMI calculator facility which allows you to check the repayment schedule of the loan before you even borrow the amount. All you have to do is enter the amount you wish to borrow along with the interest rate and the tenure of the loan, and the system will generate your EMIs and display an amortisation table that will help you understand how much you will have to pay on a monthly basis.

Ways to Build Credit History

  1. The easiest way is to log onto online aggregators, offering cards and loans from multiple financial institutions. Based on your profile, these aggregators will pass your details to banks and non-banking financial companies (NBFCs).
  2. If the institutions are interested, they will call you. But it could also lead to too many marketing calls and too many institutions asking for documents.
  3. Individuals with no credit history can take an add-on card with their parents or close relatives. An add-on card will capture your financial transactions and help you build a credit profile.
  4. Another option is to take a credit card against a fixed deposit (FD). If you open an FD of ₹20,000 or more with a bank, it would be willing to offer you a credit card linked to the FD. The limit would be close to the deposit that you hold.
  5. Banks are comfortable issuing a credit card based on fixed deposit (FD) as they can put a lien on the FD if the person defaults. The FD works like collateral.
  6. Say, a person opens an FD with a bank for ₹20,000. The bank will, typically, give a credit limit of 90% on the credit card. It means the depositor will get a card with a credit limit of ₹18,000. In such cases, the bank doesn’t need you to have any prior credit history.
  7. Once a person starts using such a card and repaying on time, he will begin building a credit history over time. Most credit bureaus take one or two years of history into account when assigning a credit score.
  8. Secured credit cards are also a good option for freelancers, who don’t have a regular income. Banks, usually, would not lend to such a profile if they don’t have a credit history.

Quick tips to help you build Credit

1. Borrow Responsibly

One of the simplest ways to build a credit history is to get a secured credit card where you regularly pay off your dues. It is advisable to take a credit card against the security of a fixed deposit with the same bank. Each bank prescribes the minimum deposit amount you need to maintain to apply for a credit card. Be watchful to work out the real cost of the credit you want, including how much you will pay back in entirety. It always helps to make financial provisions to ensure you have the capacity to repay borrowings. Remember, in order to construct a good credit history you must repay all your dues in full and at regular intervals.

2. Pay Credit Card balances strategically

The portion of your credit limits you’re using at any given time is called your credit utilization. A good guideline: Use less than 30% of your limit on any card, and lower is better. The highest scorers use less than 7%. You want to make sure your balance is low when the card issuer reports it to the credit bureaus, because that’s what is used in calculating your score. A simple way to do that is to pay down the balance before the billing cycle ends or to pay several times throughout the month to always keep your balance low.

3. Choose to be a Guarantor/ Co-Applicant

It is advisable for a new to credit user to apply for credit either as a guarantor or a co-applicant. This will help strengthen the borrower’s credit record as the primary loan holder and the co-applicant share equal responsibility for the debt, and the loan will appear on both credit reports. However, being a guarantor or a co-applicant entails a serious commitment and assurance especially when the latter is unable to make the required payments, thus affecting one’s ability to get credit in the future.

4. Review your borrowings closely

Once you start using your credit card frequently, banks will report your credit behaviour to credit bureaus, who will assign a score; a three digit number that exemplifies one’s spending behaviour and payment history. You can review your credit score by arranging for your credit report or score from the credit bureaus.

Lately, most credit bureaus have introduced a new to credit’ score for customers who have no credit footprint on the bureau. This score is usually a rank basis the performance of statistically similar customers. These customers however will not have the usual credit score that ranges between 300 & 900 in India.

Remember that your credit history starts to build up from the time that you first get credit. Your good financial behaviour now can make your access to credit faster and easier at later stages in life when you may need it more, so be responsible.