Building up your credit score from scratch can make a big difference to your financial future. While you may not need to borrow money to start your credit history, successfully applying for a credit card and managing its payments could potentially make a big difference to your credit score in a relatively short length of time.
What are your credit file and credit score?
Your credit file is a record of your history of managing money. Your credit file is created the first time you apply for something that requires a credit check. This could be applying to borrow money, such as with a personal loan, car loan or credit card. Your credit history could also begin when you apply for a post-paid phone plan, or put the internet, electricity or gas in your own name for the first time.
Each time a positive or negative credit event occurs, it is reported to a credit bureau, which records your credit history in your credit file.
Information in your credit file includes:
- Your identity, employer, and addresses
- Payment history over the past two years (including missed payments)
- Credit accounts
- The age of your credit file
- Credit impairments and negative events (e.g. payment defaults and bankruptcies)
- Credit enquiries over the past five years
This credit history is used to generate your credit score. If your credit history shows that you have a steady job, make your repayments on time, and responsibly apply for and manage credit, you’re more likely to have a good credit score. But if your credit history shows late repayments and multiple credit applications that could indicate difficulty managing money, you’re more likely to have a bad credit score.
Lenders and credit providers use your credit score to quickly assess whether you’re likely to pay back your loans, or if there’s a higher risk that you’ll default. Good credit borrowers are more likely to be offered lower interest rates, cheaper fees, and extra features and benefits, while borrowers with poor credit scores may need to fulfil stricter eligibility criteria to be approved for loans, may be charged higher rates and fees, or may see their credit applications declined altogether.
How can you quickly build your credit score?
If you don’t have a credit score, or if your credit history is fairly short, lenders may consider you something of an “unknown” when you apply for credit products, and therefore a higher default risk. While it’s not the same as having bad credit, this could still make it harder to borrow money when you need it, or to qualify for some credit products with low interest rates and extra features and benefits.
Simply paying your phone and energy bills on time to avoid late payments and defaults can keep your credit score healthy, and even gradually improve it over time. But the more evidence you can provide to show that you can responsibly manage money and credit, the more you may be able to potentially strengthen your credit score.
Applying for a basic credit card could make an impact on your credit score. Many banks and other credit card companies offer products designed to be your first credit card. While these may not offer as many of the bells and whistles such as points and rewards programs or cashback, they tend to have relatively low interest rates and fees.
Sticking to a relatively low credit limit could help you limit the risk of ending up in a “debt spiral”, where interest is being charged on your credit card purchases faster than you can afford to pay them off. You can use a credit card calculator to get a better idea of the costs involved and when you can budget for.
Even if you don’t use your credit card often, the longer you can keep it open without negative credit events such as missed repayments or defaults, the more it may be able to improve your credit history and your credit score. Just keep in mind that you’ll still need to pay any fees the card charges, and beware the temptation to max out your credit card limit on spending.