Building credit history: A guide for new-to-credit borrowers

New borrowers should avoid pitfalls that can harm their credit. Don’t apply for multiple credit cards or loans in a short period.

For new-to-credit individuals, building a strong credit score is a vital step towards financial independence. A credit score, typically ranging from 300 to 900 in India (as per TransUnion CIBIL, Equifax, Experian, or CRIF High Mark), reflects your creditworthiness and influences your ability to secure loans, credit cards, or even favourable terms for rentals and utilities. For new-to-credit (NTC) borrowers—those without an established credit history—the process requires strategic planning and consistent financial habits.

Let’s look at the practical steps to build a credit score from scratch, ensuring a solid financial foundation.

Understanding the credit score

The credit score is calculated based on factors such as repayment history, credit utilisation, credit history length, credit mix, and new credit inquiries. For new borrowers, the absence of a credit history means starting from zero, but with disciplined financial habits, you can establish a strong credit profile. A score above 750 is generally considered good, unlocking better loan terms and higher credit limits.

Apply for a credit card

Kickstarting your credit journey often begins with a credit card. Many top issuers offer entry-level credit cards with basic features, ideal for new-to-credit borrowers. Having an existing relationship with a bank, such as a salary account or fixed deposit, can boost your approval chances for their credit card.

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Alternatively, start with a secured credit card

Secured credit cards, offered by banks like the State Bank of India (SBI), ICICI Bank, HDFC Bank, and Axis Bank, require a fixed deposit (FD) as collateral, which determines your credit limit. For example, a Rs 20,000 FD might grant a Rs 20,000 credit limit. Secured cards are easier to obtain than regular credit cards and are reported to credit bureaus, helping you build a credit history.

Use the card for small, regular purchases like groceries, fuel, or mobile recharges, and pay the full balance on time each month. Timely payments are crucial, as repayment history significantly impacts your score. Keep your credit utilisation ratio below 30 percent. For a Rs 20,000 credit limit, aim to keep the balance under Rs 6,000 to demonstrate responsible credit use.

Take loans for essentials, not just credit

Don't take a loan just to build credit. Borrow only when you need it - for essential purchases such as electronics, appliances, or furniture, where a consumer durables loan might be suitable.

Look for small-ticket size personal loans with low or no processing fees from fintech platforms or banks. Repay equated monthly instalments (EMIs) diligently on the loan. Consistent on-time payments build financial discipline and demonstrate reliability to lenders. Your payment history is reported to credit bureaus, helping build your score.

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Avoid common mistakes

New borrowers should avoid pitfalls that can harm their credit. Don’t apply for multiple credit cards or loans in a short period, as each application triggers a hard inquiry, which can lower your score. Avoid high balances to maintain a low credit utilisation ratio. Also, refrain from closing credit accounts after paying them off, as this can shorten your credit history and reduce available credit, negatively impacting your score.

Be patient and disciplined

Building a credit score takes time, often 6–12 months, to show significant progress. As your credit history grows and diversifies, your score will reflect your reliability, opening doors to better financial products.

Monitor your credit report

Regularly check your credit report from credit bureaus. You can access a free credit report from the bureau once a year or use fintech apps like BankBazaar or Paisabazaar for free score checks. Monitoring helps you spot errors, such as incorrect account details, and track your progress. Dispute any inaccuracies promptly through the bureau’s online portal to maintain an accurate credit profile.