An individual’s credit score represents his creditworthiness. It is one of most important factors that banks consider when somebody applies for any kind of loan or credit card. Most people, unfortunately, realize the importance of credit score only after they have applied for a loan. In this scenario, a low credit score means either the bank will reject the loan request or provide it at a significantly higher rate of interest. Another frequent ground for rejection of loan application is absence of a credit history.
If you have not availed any loan or a credit card, then you wont have a credit history and hence your credit score will be zero. In fact, one of the biggest misconceptions around credit score is often harboured by people with a zero credit score. People, who do not need a loan, often undermine the importance of a credit score. What they fail to realize is that the need for credit may arise in the future, and building a credit score needs time.
Here are some of the adverse effects of not having a credit score/history.
Difficulty in availing best loan offers: If your credit score is zero, it means you do not have a credit history. With no credit history, banks have no data to assess your repayment behaviour and you will be profiled as a ‘risky’ prospect. This will make access to any kind of credit extremely tough and costly. Though you may be able to find lenders willing to lend to you, these loans will come with higher interest and processing costs and more stringent terms and conditions.
Interest rates will be higher: Following the general trend in advanced economies, Indian lenders are also on their way to factor in credit scores for setting interest rates. This year, Bank of Baroda (BoB) became the first Indian bank to charge differential interest rates on the basis of the credit score. For example, BoB will offer home loans @ 8.35% p.a. to applicants having CIBIL scores of 760 and above. For those having scores below 725 and between 725 and 759, the interest rates will be 9.35% p.a. and 8.85% p.a. respectively. Similarly, it will charge 8.85% p.a. to those without credit history. If this trend becomes a norm in future, absence of credit history will deprive you from lower interest rates.
No pre-approved loan and credit card offers: Many banks offer pre-approved loans and credit cards offers on the basis of your credit score. These offers are usually customised and have a much lower processing time than conventional loans. The absence of credit history will deprive you from availing such offers.
Approval of premium credit cards will be difficult: Credit cards have become an important financial tool today. Apart from providing you easy credit, they also come with attractive reward points program, discounts/cashback offers and EMI offers on credit card purchases. As credit card issuers use your credit score to evaluate your credit card application, a zero credit score means these premium credit cards will not be available for you.
How to build a good credit history
The best way to build a good credit score for those who do not need any kind of loan is to get a credit card. With a zero credit score, the best option to apply for a credit card is from the bank where you have your savings/salary account.
If you fail to avail regular credit cards due to lack of credit history or other reasons, opt for a secured credit card. These cards are similar to regular credit cards with just one exception. Banks will ask for your fixed deposits as a security on which you will continue to earn interest too.
Housewives, students and other dependants without regular income can opt for supplementary credit cards as they will not qualify for credit cards on their own. Usually, supplementary credit cards have the same benefits and features as the primary cards.The writer is Chief Products Officer of Paisabazaar.com