No Credit History Does Not Mean Good Credit History

“I have never borrowed in my life. Hence, my credit score must be perfect. And the banks would line up to lend to me.” Quite the contrary.

Firstly, no borrowing means no credit history. In absence of credit history, the banks will be in dark about your credit behaviour. They may not be comfortable lending to a person who they know little about. Of course, this does not mean you cannot get a loan or credit card if you do not have credit history. However, a good credit score helps increase odds.

Your credit score is a hygiene factor. A bad credit score can be a deal breaker. However, a good credit score does not guarantee you a loan. The lender will consider many other parameters too. “No credit history” or “insufficient credit history” is somewhere in between. In absence of credit history, the banks will be more cautious in lending to you or offering you a credit card.

Credit Score Is Not Just for Borrowing

Since you have never borrowed or used a credit card, you might become complacent and not check your credit score on a regular basis. And this can be a problem.

Note that your credit history is important not just for accessing loans in the future. If you do NOT plan or need to borrow in future, you may think it matters little whether you have a good credit score or a bad score. Not completely right.

You may be required to produce your credit report for seemingly unrelated things. For instance, I was asked by the regulator to submit my credit report when I applied for the investment adviser license. And this was over 6 years ago. I do not know how the regulator looks at a good or poor credit score and how that affects the chances of approval. However, since it was asked, a bad credit score would have made me jittery.

You may be a director in a company. If that company tries to borrow, your credit history will be checked. A poor credit score, for any reason, can be a red flag there.

In the future, it is possible that your prospective employer might check your credit score before your interview. Or your customers/vendors might want to check your credit report before they sign up with you.

So, if there is even a slightest chance your credit report may be important, you need to keep an eye on your credit score.

Editor’s Note: In western countries, credit score is increasingly being used as a criteria when choosing a date and/or prospective life partner. A person with high credit score is perceived to be a financially responsible, trustworthy and intelligent.

Why Would Your Credit Score Be Bad if You Have Not Borrowed?

There can be many reasons.

  • Errors in uploading data by the lenders
  • Fraudulent loan applications in your name
  • You may have acted as guarantor in a loan. If there have been delays in payments of such loans, your credit score will suffer.

Therefore, it is important to keep an eye on your credit score even if you have not borrowed. Now, you can access 1 credit report per calendar year (January 1- December 31) for free from each of the credit bureaus. So, it is not a burden on your pocket either. If the credit score is not good for any reason, take steps to improve your credit score.

Why Wouldn’t You Want to Use a Credit Card?

We have seen building credit profile (history) can help in many ways. Still, why wouldn’t people use a credit card or borrow? Many people are not comfortable with using credit cards or borrowing in general. And there are valid reasons too. You are concerned that you may end up overspending. Or you are wary of frauds? While the fraud or behavioural risk can never be eliminated, you can easily manage such risks.

Work with a lower credit limit. Set transaction limits on your cards. Use your card safely and responsibly. But yes, if you cannot do this, do not use a credit card.

If there is stigma attached to borrowing, use a credit card. If you pay your bills in full and on time, a credit card is more about ease than about borrowing. You make your purchases using your credit card and settle the bill after a few weeks.

What if You Cannot Get a Loan or a Credit Card?

Sometimes, you may find it difficult to get a credit card due to low income, job profile or any other reasons. How do you build your credit score in such cases?

Secured loans (loans against FD, gold, property, securities, property etc) might still be possible in such cases. Similarly, you can get a credit card against a bank FD. You can use these means to get access to credit and build & improve your credit profile.

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