5paisa Loans Blog

Why financial institutes don’t lend to those who do not have credit history?

By Anurag Srivastva | 17 Mar 2020

CIBIL score indicates the capacity to pay and your past track record of loan repayments. Normally, CIBIL scores are pegged to a maximum score benchmark of 900. It is practically impossible to achieve 900 but, a score of above 700 is mandatory to be eligible for loans.

With peer-to-peer lending companies, borrowers with lower credit scores are also able to borrow but they have to pay a higher rate of interest. The CIBIL score is based on your loan repayment track record, timely repayments and the proportion of your total EMI servicing to monthly income. That is what determines your personal loan eligibility. But what if you have never borrowed and do not have a single credit card? Would you be at an advantage in getting a personal loan? The answer is an emphatic “NO”. Borrowers with no credit history will have trouble getting loans.

If you have no credit history; you don’t get loans

That surely sounds ironic, right? Here is why lenders insist on a credit history.

• Absence of credit history is OK if you are just entering professional life. But in the first five years you are expected to build a credit history. This forms the basis of your future relationships with financial institutions.
• Most lenders give a lot of importance to credit habits. Credit history tells the lender if you are over-leveraged vis-à-vis your income levels. Credit history also reveals how much of your income goes towards servicing loans.
• Credit history is also a good record of your credit practices. Here are a few questions it answers. Have your EMIs gone on time or have cheques bounces? Do you roll over loans? Do you keep applying for loans from multiple sources?
• Ability to pay is captured by the credit score but credit history also addresses your willingness to pay. Many borrowers have the habit of taking loans and then trying for negotiated settlements. Such borrower intent is captured by credit history.

Even if you are financially comfortable, make it a point to start building your credit history and keep it clean. It will help later when you need to acquire assets like car / home etc.