February 8, 2024

How to build a credit score from scratch: Tips for young adults and those new to credit

For many young adults building a credit score is the key to building a good financial reputation. Achieving future finance-based goals, such as buying a home or starting a business becomes easier with a good credit history. For a head start in building credit, we have the right tips and strategies for you.

Understanding Credit Scores

Before we dive into tips and strategies for building a credit score, it’s important to understand what it is. Well, it is a three-digit number that represents the creditworthiness of the borrower. The most commonly used credit score model is Experian, and its range is 300-900. A score of 300 is the least and 900 is the maximum. Those looking for a Personal Loan should have a minimum credit score of 630.

Building of Credit Score

Credit score builds based on various activities, like – loan payment history, length of credit history, and types of loan. See how they contribute to your credit score building –

1. Loan Payment History:

Your loan payment history holds a 35% portion of your credit score. This is because it shows your behaviour with credit repayment. It means on-time payments can get you to a good start.

2. Length of Credit History:

The length of your credit history is another important factor that contributes to credit score building. It gives an impression of a long and stable credit history and holds 15% of the portion of your credit score. So choosing a long period for loan repayments is advantageous in credit score building.

3. Types of Loans:

The types of loans you have contributes 10% to your credit score. It means having a mix of different types of loans, such as secured and unsecured loans.

Overall, building a credit score requires some responsibility. In the next step, we’ll tell you tips on building a credit score.

Building Credit Score: Tips and Strategies

Now that you understand how credit scores are calculated, let’s discuss the different ways to build credit from scratch. Here are a few tips and strategies to help you get started:

1. Apply for a Personal Loan:

Many financial institutions offer personal loans designed for your needs. And if you have no credit history or limited credit history, they’ll consider other Personal Loan eligibility requirements, such as income.

2. Get a co-applicant:

If you have a family member or friend with good credit, you can ask them to be your co-applicant for a Personal Loan. This way, you can get a loan even if you don’t meet the Personal Loan eligibility requirement of credit score.

3. Take out a small Personal Loan:

Many financial institutions offer Personal Loans starting from Rs 50,000, so to build a credit score and meet short-term needs, they are suitable. With Personal Loan EMI Calculator, you can easily choose a suitable loan repayment period for a small loan.

4. Pay bills on time:

Even if your bills aren’t reported to the credit bureaus, paying them on time is an important part of building your credit score. Timely payments can have a positive impact on your credit score, so it’s essential to pay your bills on time every month.

Maintaining Good Credit

Once you are done building a credit score, it’s important to maintain it and keep it in good standing. Here are a few best practices for maintaining good credit:

1. Pay bills on time:

As mentioned earlier, paying bills on time is crucial for building and maintaining a good credit score. For this, you can set up automatic payments or reminders to ensure you never miss a payment.

2. Keep credit utilisation low:

Your credit utilisation rate is the amount of credit you are using compared to the total amount of credit you have. A high credit utilisation can negatively impact your credit score, plus you’ll have difficulty managing your debt. To maintain your credit score in this area, it’s important to keep your credit utilisation rate low by using only a portion of your available credit and paying your due balances in full each month. Try to keep your credit utilisation below 30% of your credit limit to ensure the score remains in good standing.

3. Check your credit report regularly:

It’s important to check your credit report regularly to ensure there are no errors or fraudulent activity. This way, you can ensure your credit record is up to date as your loan repayments are done. You can also check your credit score through the websites of leading NBFCs for free.

4. Avoid Too Many Credit Inquiries:

When you apply for a loan, the financial institution will typically check your credit report, which is called a credit inquiry. Too many credit inquiries can negatively impact your credit score, so avoid applying for multiple loans at a time. To maintain your credit score in this area, it’s important to only apply for a loan when you need it.

In conclusion, building a credit score is essential for achieving long-term financial goals for young adults. By understanding how credit scores are calculated and implementing the strategies mentioned in this article, one can build and maintain a good credit score.

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