What is credit history, and why does it matter so much for first-time borrowers

Credit history refers to the documentation of an individual's borrowing and repayment behaviour over a period of time. This behaviour is encapsulated in the form of a credit report. These reports are provided to borrowers through various leading credit bureaus. Currently, there are four major credit bureaus in the country: CRIF High Mark, CIBIL, Experian, and Equifax.

These credit bureaus primarily provide credit scores in the range of 300 to 900. They also provide credit reports that have a holistic collection of a borrower's credit history. These statistics help reflect how responsibly a borrower manages their personal loans, credit cards, and other financial obligations.

That is why new borrowers must understand the basic concept of credit history, as it acts as a financial credibility score for lending institutions. A blemish-free credit history can determine the approval of personal loans, credit cards and the applicable interest rates on these credit products.

Why credit history matters for new borrowers

Credit history has immense importance for new borrowers due to the following reasons:

1. Banking institutions and NBFCs rely heavily on one’s credit history. They conduct thorough background checks before approving credit cards, personal loans, or home loan applications.
2. A strong credit report and a high credit score, preferably a score of over 750, can help in securing personal loans at a lower interest rate, saving money in the long run. That is why a strong credit report plays an important role in the determination of applicable interest rates on various credit products.
3. Credit limit decisions are also taken based on one’s credit history. Lending institutions use the borrower's history, past defaults, if any, to decide the amount of credit they can safely permit.
4. Faster loan and credit card approvals are also permitted to applicants with a clear repayment track record, solid credit history and a high credit score.

Building and maintaining a healthy credit history

To ensure that you can build and maintain a healthy credit history, you should follow the given steps diligently:

1. The first rule of a reputable borrower is to make repayments of pending credit card bills and loan EMIs on time.
2. Focus on avoiding missing any pending payments or overextending your credit utilisation ratio.
3. To achieve this, you should set an alarm or auto debit in your financial accounts so that no due dates are ever skipped.
4. Go through your credit report consistently, in a responsible manner, to correct any glaring mistakes that can harm your credit score.
5. Responsibly diversify your credit mix. A balanced mix of secured credit, i.e., home and auto loans, along with unsecured loans such as credit cards and personal loans, is the way to go.

Risk factors for new borrowers

Given that maintaining a clean credit history is essential, new borrowers should remain cautious and vigilant. Taking several loans simultaneously or overextending credit can result in rapid debt accumulation.

This can negatively influence the borrower's credit score. Personal loans, in particular, carry high interest rates, processing fees, and other related repayment complexities, even if repayment is delayed.

Any new loan or credit card must only be availed after proper due diligence and consultation with a certified financial advisor; a robust credit history, hence, is no longer optional; it is a prerequisite for financial opportunities in the nation's rapidly evolving lending ecosystem.

Disclaimer: MintMoney has tie-ups with fintech companies for providing credit. You may be required to share your information if you apply. These tie-ups do not influence our editorial content. This article is intended solely to educate and spread awareness about credit-related needs such as loans, credit cards, and credit scores. MintMoney does not promote or encourage taking credit, as it involves risks such as high interest rates and hidden charges. Readers are advised to consult certified experts before taking any credit.