How to get a loan with no prior credit history?

Ranjit PunjaCreditmantriHave you applied for a loan, confident that the absence of any previous credit history gave you an advantage during the loan approval process? There is a strong chance that, to your shock, you were turned down precisely because you had never applied for credit before. You have plenty of company - many millions of Indians are unaware of the damaging effect of a negligible credit history on their ability to obtain any kind of credit, whether a loan or a credit card. Why do so many Indians have a zero to minimal credit history? The conventional wisdom in India has been, and in many cases continues to be, that all debt is bad debt. Taking a loan is seen as a last resort and something to be avoided, if possible. As a result, a large number of Indians wear a clean credit slate as a badge of pride little realizing how harmful it is to their ability to access credit when they really need it. Why is a prior credit history such an essential part of your loan-eligibility? In the formal financial system, credit scores, credit reports, loans and credit cards are all integral parts of the loan approval process. When you apply for a loan, potential lenders like to evaluate your past repayment history to judge if you are at high risk for default. Naturally, the longer your credit history, the more information they have to make a decision on. If you have no prior repayment record, lenders become nervous about your willingness to repay your loan obligations on time as they have no record of your credit behaviour. That is why a credit history is such a vital factor in your ability to secure loans. So how do you go about building credit history? There are two immediate steps you can take to help build credit and become loan eligible.Apply for a secured credit card: A secured credit card works exactly like a regular credit card, except that it is against the security of a fixed deposit. The great advantage of this card is that since it is secured by a deposit those with no credit, or even bad credit, can qualify for one. The bank has no need to judge credit history since its money is safeguarded by your deposit. You, in turn, can build your credit history by using the card judiciously and making every single credit card payment on time and in full. Using a secured credit card responsibly will help you create and maintain a healthy credit history. Once you have used the secured card long enough, you can apply for a second, regular, ‘unsecured’ credit card and build a good repayment record on each of your cards. Take small loans even if you don’t need them: In order to build credit, you need to take credit. Since you have no prior history, you will not qualify for large loans like a housing, auto or personal loan. Instead, start with applying for a small consumer durable loan for a few thousand rupees. Given the small size of the loan and provided you have a suitable income, you will be able to qualify for credit even without any prior history. Make sure that you make all your loan repayments on time so that you develop a good credit history. Once you pay off your first loan, apply for a larger loan the next time. Making all your repayments on time across every single loan will help you build and maintain a healthy credit profile, enabling you to become loan-eligible in the future.There are some lenders who look only at your monthly income – and not at your credit history - when making a lending decision. You stand a good chance of obtaining a loan even without a credit history with such lenders provided that you qualify for the income criteria. However, the majority of banks and NBFCs look at your credit score and history when evaluating your loan application and developing your credit profile will allow you to qualify for a much wider selection of offers. Using a secured credit card responsibly and obtaining small loans are guaranteed to build your creditworthiness so that you become loan-eligible. If you thought you were being financially responsible by not taking any loans, it is time to rethink your credit approach, and take these simple steps to ensure you are not left out of the credit world again.