Building a good credit score without using a credit card is achievable with consistent fiscal practices and financial discipline. Instead of using credit card history to prove that you have a strong credit profile for future borrowing needs, you can instead show that your fiscal habits are in line with the creditworthiness requirements of banks and NBFCs.
A clean credit profile will be useful when you apply for a credit card, home loan, mortgage or personal loan in the future; and is possible through proper planning.
What is credit score? How is it evaluated?
Your credit score is a three-digit number, determined by your past credit behaviour. It indicates to lenders that you are financially responsible. Lending institutions often assess the creditworthiness of aspiring borrowers using the 5 C’s of credit.
- Character: This is inferred from your repayment history and credit discipline, showing how reliably you have handled past credit and repayment timelines.
- Capacity: This metric measures your ability to repay based on income, employment stability, and existing financial commitments without falling into further debt.
- Capital: This is an indicator of your fiscal strength through an assessment of your investments, personal assets (i.e. gold, etc.) and savings.
- Collateral: This is the assets that you have that can be pledged to secure a loan and de-risk the lender.
- Conditions: This examines the purpose of your loan application and the financial conditions that could impact repayment on your part. A part of this is the conditions that define how the loan will be repaid and resolved in case of any dispute.
How can I build credit without a credit card?
Here’s how you can start:
- Apply for a personal loan or secured loan (against your fixed deposits) from a bank or non-banking financial company, which you can pay back as per the repayment plan without missing any due dates.
- Use EMI offers for purchase of products and services or choose the Buy Now Pay Later (BNPL) option to show that you have the financial discipline to repay debt and establish a clear credit history and solid credit profile.
- You can also show good credit history by ensuring that your utilities — such as bills for electricity, rent, and other subscriptions are paid consistently and in a timely manner over the years.
- Maintain steady income and employment to show fixed cash flow and repayment ability for lenders.
- Ensure that your loan applications are made to only select lenders as an overabundance of applications from one user could trigger ‘debt inquiry’ for your credit profile and hit your overall score.
The goal is to showcase responsible fiscal behaviour through repayment of other financial obligations such as EMIs, bills and loans.
How can I access my credit report?
Credit bureaus such as Equifax, Experian, CIBIL and CRIF High Mark provide credit reports. As per regulatory requirements, you are entitled to one free credit report each year. You can access this to monitor and review your credit score.
Notably, your credit score will improve gradually over a period of six months to a year, following responsible repayment patterns.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
