Can You Get Loan Without Credit Score? Are Credit Cards Necessary? Experts Explain

There is no denying that credit score plays an important role in determining loan eligibility. It also helps banks decide the interest rate to be charged to the borrower. However, there are many first-time loan applicants who neither have a borrowing history nor a credit score. If you are one of those, you might wonder whether the bank will consider your application for the loan or not. Also, there is a wide misconception about credit cards as well. People often think that having a credit card is directly proportional to a good credit score. However, that is not the case.

First Time Borrower And Credit Score

Pankaj Mathpal, MD of Optima Money Managers, said that banks do give loans to first-time borrowers even if they don't have credit cards or credit scores. "If you don't have a credit history, you will get a loan but the amount may be comparatively small. However, if you need a bigger loan amount, then there should be some previous records showing that you have a good repayment history. When there is no credit history, banks do give loans but charge a little higher rate of interest, said Mathpal. He, however, said that banks do give secured loans like home loans to first-time borrowers even if they don't have a credit score. 

Sudipta K Ghosh, co-founder of Roopya, said that when a salaried person doesn't have a credit score, typically it is denoted as a score of ‘-1’ or NH. "Different credit bureaus may consider different score formats. However, there is nothing to be worried about. It simply means your score can’t be ascertained due to lack of any credit history," said Ghosh adding that the person can apply for a loan or a credit card. 

Ghosh further said, "Credit cards are not necessary for increasing credit score. Credit cards are one of the tools to increase credit scores. You can have any loan product and by simply following the repayment plan one can increase credit score." When asked about the impact of credit cards on credit score, Ghosh said that timely repayment of any credit outstanding including credit card has a positive impact on credit score.

How Banks Decide Your Credit Score?

Ghosh shared that banks assign different weightage to some parameters like Payment History and Credit Utilization for credit scoring basis repayment patterns. 

Payment History (35%): The most significant factor affecting credit scores is payment history. Timely payments positively impact the score, while late payments, defaults, or bankruptcies can have a negative effect.

Credit Utilization (30%): This factor measures the amount of credit being used compared to the total available credit. Keeping credit utilization below 30% is generally recommended for a healthy score.

Length of Credit History (15%): The length of time you've had credit accounts affects your score. A longer credit history demonstrates a track record of responsible credit management and can positively impact the score.

Credit Mix (10%): Lenders want to see that you can handle different types of credit responsibly. A mix of credit accounts, such as credit cards, loans, and mortgages, can positively influence your score.

New Credit Applications (10%): Opening several new credit cards or even any credit accounts within a short period can raise concerns for lenders. Multiple credit inquiries may hurt your score.

Using Credit Card As An Effective Credit Tool 

Mathpal advised that one should never exhaust the full limit of their credit cards. "You should not use more than 30-40 per cent of your total credit card limit. When you use the maximum amount from a credit card, it shows that you are credit hungry. Also, if you are only making a minimum payment and taking forward the rest of the amount, it shows that your repayment history is not good. In case you have defaulted on the credit card payment due date, you should try to repay the amount as early as possible," said Mathpal.

Cautioning people against owning multiple credit cards, Ghosh said that one should not open unnecessary credit accounts. "Limit the number of new credit accounts you open, as multiple credit inquiries can temporarily lower your credit score. Apply for credit only when necessary and be mindful of the potential impact on your score," said Ghosh. 

Some Tips To Improve Credit Score By Sudipta K Ghosh:

Timely Repayments: Demonstrating responsible credit behaviour over time can improve your score. Make consistent, on-time payments, and avoid maxing out credit cards or taking on excessive debt. Set up payment reminders or automate your payments to ensure you don't miss any due dates.

Low Credit Utilization: Always try to use only a small portion of your available credit. Keeping your credit utilization ratio below 30% is generally recommended. Regularly monitor and pay off credit card balances to maintain a low utilization ratio.

Diverse Credit Mix: By maintaining a diverse mix of credit accounts, such as credit cards, loans, and mortgages, can positively impact your credit score. However, only take on the credit that you need and can manage responsibly.

Check Credit Report: Check your credit report from the major credit bureaus (CIBIL, CRIF, Equifax and Experian) at least once a year. Ensure that the information is accurate and dispute any errors promptly.

Closing Of Credit Accounts: Closing credit accounts can impact your credit utilization ratio and overall credit history. Consider keeping old accounts open, especially if they have a positive payment history.

Outstanding Debt: Reduce your overall debt burden by making regular payments and creating a plan to pay off outstanding balances. Lowering your debt-to-income ratio can positively impact your credit score.