Understanding Credit History: Fundamentals And Strategies For Building It

Key Takeaways:

• Creditworthiness enables you to borrow money and use credit cards to meet life’s various goals.

• Your credit score plays a key role in securing loans, mortgages, and credit cards on favourable terms.

• If you’re new to credit, consider starting with secured credit cards or credit-builder loans to establish a credit history.

• Good credit habits, such as making timely payments, keeping credit utilisation under 30% and maintaining a long credit history, are crucial for preserving and improving your credit score.

Whether you are starting a business, planning to buy a home or want funds for any other personal or professional goal, understanding credit history, and your creditworthiness is crucial. It can help you open doors to various opportunities and avoid financial pitfalls.

Credit history is a record of your past borrowing and repayment behaviour, including loans, credit cards, and debts. It tracks payment timeliness, outstanding balances, credit limits, and account durations. This forms the basis of your credit report compiled by bureaus like Equifax, Experian, and TransUnion CIBIL. 

Lenders review your history to assess your creditworthiness for loans or cards. Strong profiles with a flawless history allow you to borrow more at pocket-friendly rates. Negative marks like late payments linger up to seven years, so timely payments help build a solid profile.

Your credit health refers to how you have managed credit in the past, how much debt you currently have and how lenders are likely to view your profile as a borrower. Financial companies check your credit history to assess the risk you pose when assessing your application for a loan or a credit card. 

With a positive credit history that shows experience across a mix of credit facilities and timely repayment, you can get premium credit cards, quicker loan approval and favourable loan terms that reduce your overall cost of borrowing.

Also Read: What is Lifetime Free Credit Card and How to Apply?

A credit score is a numerical representation of your creditworthiness, typically ranging from 300 to 900. It is calculated based on several factors which impact your ability to borrow. Check out the credit score basics from the table added below:

If you don’t have a credit history, remember that taking credit smartly and repaying it on time is the best way to start. Here is how to build a credit history effectively: 

If you have a non-existent credit history, secured credit cards can be an ideal option. These cards have more relaxed eligibility criteria, which makes it easy for you to qualify for them. All they require is for you to start a fixed deposit account and use it as collateral to secure a credit card. The credit limit you get is based on the FD amount and your bill payment is recorded in your credit history.

Your repayment history contributes to 35% of your credit score. By taking a credit builder loan that you can confidently repay, you can showcase yourself as a responsible borrower. 

Such loans are offered to those who are new to credit and work differently as compared to traditional loans. You first repay the loan and interest in regular installment and then you get access to the loan amount. This loan can help you establish a credit history easily.

Checking your credit history starts with obtaining your free credit report from major bureaus like Equifax, Experian, and TransUnion CIBIL. To get your credit report, you can create an account and log in using your credentials on the official website. 

With one free annual credit report, you can check your credit history without paying any fees. Other platforms may allow you to monitor your credit history more frequently at no cost. Review the report for personal information, account details, payment history, account balances, and inquiries. All reports include your credit score, so check it to get an overview.

Once you’ve established a credit history, maintaining good credit is crucial. Here are some of the practical tips and strategies that help you reach a high score:

• Timely Payment: By making repayments on time, you can showcase responsible financial behaviour. Set up an auto-pay or reminders to pay EMIs and credit cards bills by the due date and avoid any late charges.

• Credit Utilisation: Aim to use less than 30% of your available credit limit. This is because high credit utilisation can negatively impact your score.

• Credit Applications: Lenders conduct a hard enquiry of your credit report to check your creditworthiness when you apply for a loan. Since too many enquiries can lower your score,  apply for credit only when necessary.

• Length of Credit History: The length of credit history makes up 15% of your score. So, keep your old credit accounts open to extend your credit age and score.

• Mix of Credit Types: Having a healthy mix of credit (credit cards, unsecured and secured) improves your profile as it showcases experience across the board.

Credit history shapes your financial opportunities by signalling the risk you pose as a potential borrower. A strong history unlocks lower interest rates on loans, mortgages, and credit cards. It also reduces borrowing costs and boosts purchasing power for homes, cars, and even education.

Poor credit history leads to rejections, higher rates, or smaller loan amounts, creating a cycle of financial strain and limiting major life goals like homeownership. Timely payments and low utilisation build a positive history, enhancing your negotiation power and long-term financial stability. This is why it is important to regularly monitor your score.

If your credit score is low, proactive steps can help improve it. These include:

• Monitoring Your Credit Report Regularly: Obtain free reports from Experian, Equifax, TransUnion CIBIL or CRIF High Mark. Look for errors or fraudulent activities that may be pulling your credit score down.

• Disputing Inaccurate Information: If you find mistakes, report them to the credit bureau for correction.

• Repaying Debt Strategically: Focus on repaying high-interest debts first by making more than the minimum payments when possible.

• Using Credit Responsibly: Avoid maxing out credit cards, as a higher credit utilisation ratio will lower your credit score. Moreover, keep unused credit accounts open to maintain credit length, which will positively impact your score.

If you are new to credit, apply for a secured credit card by putting up a fixed deposit as collateral. You can even apply for a credit builder loan to showcase your ability to handle a loan responsibly.

You must check your credit score at least once a month through a free credit monitoring service. Don’t forget to check your full credit report from major bureaus annually.

Yes, because it can reduce your credit history length and available credit limit while increasing your credit utilisation. If needed, keep the card active, but use it occasionally for small purchases.

Minor improvements may be seen in 3 to 6 months with consistent payments. Significant improvements may take 12 to 24 months, depending on the score and the reason. Remember, settlements and defaults may stay in your credit report for up to 7 years.

Yes, you can improve your score by using credit builder loans and secured loans.

Credit history is the detailed record of your borrowing and repayment activities. It includes loans, credit cards, payment timeliness, balances, and inquiries. It is compiled in a credit report by bureaus like TransUnion CIBIL to give a full narrative of your financial behaviour.

The CIBIL score is a three-digit number, between 300 and 900, derived from that history, summarising your creditworthiness. This depends on factors such as payment history (35%), credit utilisation (30%), credit length (15%), credit mix (10%), and new inquiries (10%). 

If you spot errors in your credit report, file the dispute directly with the credit bureau online via their portals. Bureaus investigate this within 30 days, verify the data with the lender and update or remove inaccuracies free of charge.

Return to Category