Think about it, you wouldn’t lend something valuable to a friend who is notoriously bad at giving things back. The same applies to borrowing money.
Building up a good credit history that proves you’re trustworthy can help you not only borrow money but help with lower interest rates with fewer fees and charges later down the track.
Here are five tips to build your credit history and create great habits.
When you take out a loan or apply for a credit card, the finance company will use your Credit Report to determine your credit worthiness when deciding whether to lend to you.
Your credit score is calculated based on what’s in your credit report, which includes how much money you've borrowed, how many credit applications you’ve submitted, the timeframes of when each credit application was applied for, whether you pay on time, and other factors. The stronger the score, the better.
To build up a good credit score you need to have a history – but there is a balance. You don’t want to fill it out too much with credit applications as this can negatively affect your credit score, but just enough to give you a history.
Opening new accounts like a phone bill, credit account, active loan, or even being added as a user on someone else’s credit card can help. This even includes utility accounts when you move house or start renting. Keep in mind that if you need to close an account, make sure it doesn’t have a negative account balance.
Paying off your bills and showing a history of on-time repayments proves to a lender that you can be trusted with your budget. If you don’t pay your bills on time and leave them overdue, like gas, electricity or your phone, they may report you to a debt collecting agency which will negatively impact your credit record. Your credit card and loan information is in the system for two years, and defaults can stay in the system for five years. Check out our tips to repay your personal loan.
Put a reminder in your phone for when your payments are due so you don’t forget, or set up a direct debit so it comes out automatically – just make sure there’s money in the account that it’s being drawn from. You can usually ask for your repayments to be taken out on the days after you get paid which can reduce the risk of money not being available in your bank account.
Basically, if you can juggle things like a mortgage, car loan, small personal loan, phone bill, and student loans, you can demonstrate your ability to budget and wade your way through different kinds of debt.
Using different types of credit can prove that you’re a flexible, versatile, and trustworthy lender – just don’t use too much credit. Each credit card you take out or loan application you make is recorded, so if you make too many, it may be seen as financial difficulty. Depending on the lender, even the simple act of submitting an application to find the best rate can be recorded in your credit history.
Plus, aside from looking like financial difficulty, taking out too much credit can be difficult to repay.
Always have a think about whether you actually need the loan before you apply for one and do some research on how many applications you can submit before it affects your credit rating.
Live within your means. You don’t want to bite off more than you can chew, so make sure that you borrow what you know you can pay back.
If you can, pay more than the minimum amount on your credit card or loan repayments. Some loans will charge you if you make extra payments, so check the fine print.
Or, if you have a number of loans that you’re paying back, think about a debt consolidation loan. This combines all of your debt so you only have one repayment schedule to deal with rather than a few. This makes it easier to pay them off on time and it’s always better planning to have one set amount you can budget for.
It’s a win/win as a debt consolidation loan will also give you one interest rate to worry about so you know exactly what you’re paying back.
You get one free credit report every year. It’s a good idea to check where you’re at so you know how much you need to improve, as well as look at the fairness and accuracy of your credit score. If there are errors, it’s best to know now so you can try and fix them. Credit providers or a credit reporting body, like Equifax, can investigate and make changes if they find that there’s a mistake.
If you’re struggling to pay back your debt, don’t hesitate to ask for help and let the lenders know. You can ask for financial hardship assistance if you’re drowning in debt. Many lenders can provide payment plans to help you get back on track.
It’s also a great idea to contact a financial counsellor for a free and confidential chat about your finances. They can help you to create a budget or even talk to lenders to sort out a plan.
Your credit score will start to improve once you follow these steps but it will take time. If you’re looking to buy a house, apply for a high value loan, or want the confidence knowing that you’ll be more likely to be approved, working on your credit history is your best bet.
To keep an eye on your score, you can get one free credit report every year – so what are you waiting for?
The information contained in this blog is general advice only and does not take your specific circumstance into consideration. You should assess your own financial position, objectives, and requirements before making any financial decisions.
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