Has your credit card application been rejected? If yes, do you know the reason? The banks usually do not tell and just reject the application. If you have recently started working and had applied for your first credit card, a reason for rejection could be the lack of credit history. Also known as ‘No Credit History’ or ‘No Hit’.
Why Is Your Credit History Important?
Before approving your credit card application, the bank must assess your creditworthiness (or whether you will return the money you borrow). But how does a bank figure this out beforehand? That is where your credit history/credit report/credit score helps.
Your credit history tells the banks how responsible you have been with your other credit facilities in the past. Whether you have been paying your EMIs and credit card bills on time?
If you have been disciplined with credit in the past, there is a good chance that you will be responsible in the future too. As they say, habits die hard. Therefore, the banks are comfortable lending to borrowers with a good credit history or a credit score. A high credit score may also help reduce the cost of your loan.
The banks may look at other aspects too before deciding on your loan application — your employment details, salary/income details, other sanctioned credit facilities etc. These details may not only be crucial in deciding the binary outcome of your loan/card application, but also the quantum of sanctioned loan or credit card limit.
However, what do you do if you do not have any credit history? You will not have any credit history if you have taken a loan or held a credit card in the past.
And if no bank is willing to sanction a credit facility (credit card or loan) in the absence of a good credit history, how do you build credit history in the first place? Becomes a classic chicken or egg problem, doesn’t it?
If you are new to credit and are struggling to get a credit card or a loan simply because of lack of any credit history, what do you do? How can you build credit history and improve your credit score? There are a few things that you can do.
Taking Secured Loans or Credit Cards
Why are the banks not keen to issue loans or credit cards to those without credit history or a poor credit history?
Because they fear the borrower may not pay back the money. If you do not repay the loan and settle card dues, it is a loss for the bank. However, if you take a secured loan, the bank can sell the security to recover its dues. And this may be the comfort the bank is looking for.
Not all security is treated equally. Liquid and less volatile assets such as bank FDs and gold are preferred options, and you may be able to get quick loans against these assets.
#1 Loan against Bank FDs
The banks will easily offer you a loan/overdraft facility/credit card against a bank FD. A bank FD is safe and liquid. The bank has nothing to worry about.
The credit limit will depend on the amount of the bank FD. Usually, the banks are willing to give up to 85-90% of the FD amount as credit limit. You can check the finer details with your bank.
Repaying this loan or settling dues on this card will help you build credit history and improve your credit score. In the future, with a decent credit score, you may be able to get an unsecured credit card or a personal loan as well.
#2 Gold Loans
You will not get a credit card facility against gold, but you can get a gold loan against your gold jewellery. RBI keeps adjusting the Loan-to-Value for gold loans. The current LTV for gold loans is 75%.
Gold loans are available against gold jewellery and sovereign gold bonds.
For gold coins, the loan can be extended up to 50 gm of gold coins. No loan facility against gold ETFs or gold mutual funds. Refer to RBI Master Circular for more details on these limits.
#3 Loan against Shares/Securities/Mutual Funds
If you have invested in stocks and mutual funds, you can take loans against those investments too. You can get up to 50% of the pledged value in case of equity mutual funds. The Reserve Bank of India has imposed this limitation. While there is no explicit restriction imposed by the RBI for debt securities, the banks may have additional limitations on the quantum of loans.
The banks may not be as comfortable lending against individual stocks and may have stricter policies compared to mutual funds.
Certain banks have tied with CAMS (a registrar and transfer agent) to provide loan facility instantly against the MF holdings.
#4 Loan against Life Insurance Policies
You can get loan only against a traditional life insurance plan. Non-linked plans.
You can get up to 95% of the surrender value of the life insurance policy. You can find out more about loans against insurance policies in this post. Life insurers are mandated to offer loans against such policies. Moreover, you can also reach out to banks for such loans against insurance plans. The insurance policy will have to be assigned to the lender for such loans.
You will not get loans against a term life insurance plan or a ULIP. Term insurance plans have no maturity value and hence cannot be an effective security. IRDA, the insurance regulator, prohibits any loans against ULIPs and unit-linked insurance plans.
#5 Loan against Property
If you have a property, you can take a term loan or an overdraft facility against the property. You can take a loan against both residential or commercial property. The bank can offer you a loan of up to 50-70% of the property value. However, the final loan/overdraft limit amount will also depend on your repayment ability.
While the bank does not have the security of your property, it is not easy to sell the property to recover the loan amount. Therefore, your repayment ability becomes quite important with such loans.
By applying for a secured loan, you provide comfort to the bank and make up for the lack of a good credit score (or even absence of it). By repaying the loans on time, you can build your credit score gradually.
Reach out to the Bank Where You Have a Salary Account
The bank where you have the salary account has details about your salary and regular credits and debits. Armed with this information, the bank may be willing to offer you an unsecured credit facility.
There are no guarantees here. Years ago, my credit card application was rejected by the bank where I held my salary account. However, this is indeed an aspect that banks can derive comfort from.