In this article, you will learn about how credit history is formed and the best way to start your credit journey.
While some lenders completely disregard credit history, they do so at the cost of higher interest rates and lower borrowing amounts.
When you finally turn eighteen you the world finally opens up for you and it’s time to get a job or to start studying and eventually buy your own home, car and whatever else your heart desires.
Unfortunately, things get a little complicated. As soon as you apply for a mortgage, vehicle loan or even a store card, the first thing that the lender will check is your credit history and at this point, you have none!
What is credit all about?
Your credit history refers to a financial log of your past repayment history which is kept by the four major credit reporting agencies in the country.
This information records what accounts and loans you have as well as your repayment history and any defaults or adverse financial events including bankruptcy and judgments.
If you have not yet had any form of credit then you will not have a credit history to reflect and obtaining credit may actually be quite challenging.
Building a credit good credit score
Knowing where to go to start building a credit history in the safest and most effective way but can be difficult especially if you have never known about it until now. While the checking of your credit history may be frustrating, it is necessary to protect both you and the lender.
The lender will assess how you have handled credit repayments in the past and determine if you can afford credit now. The lender does not want to lose money but they also do not want to forcibly place you in a situation that would be detrimental to your financial wellbeing.
Credit reporting agencies in Australia
- Illion, and
- Tasmanian Collection.
Building a good credit record can take some time which is why it is best to start as early as possible so that it is available when you need it. While the entire process might be very daunting, take comfort in that everyone had to start their journey somewhere. Let’s discuss some options that are available to individuals who have not yet got any credit history to their name.
Credit score building credit cards
While credit cards carry some negative connotations, if used correctly they can be a viable source of good credit as well as a safety net. But, if misused, they can be a quick way to a debt trap. As an individual with no credit history there are two options at your disposal: secured credit cards and joint credit cards.
Secured credit cards are tied to your savings account. The limit you have access to in credit is usually the amount in your savings account or a percentage thereof. This means that the credit card is secured to the value of the savings you have.
If you are unable to repay the amount borrowed, the savings will be used to repay the debt. By using reasonable amounts of credit and making repayments on time, you can start the beginning of good credit history.
Joint credit cards are resorted to when a lender refuses you a credit card. In this situation, your parent(s) will either add you as a beneficiary on their credit card and give you access to your card or will open a new joint account with you.
You will be responsible for keeping up with the repayments and fees but, if you are unable to make those payments, your parent(s) will have to make a payment on your behalf. However, this is only a viable option if your parent(s) are in a good credit position themselves.
If you are studying either at a college or university, there is a good chance that you have a student loan. The student loan repayments are reported to the credit association, so making timely payments can be a good way to head off your credit history.
If you own a vehicle then you can take out a small secured loan. The lender will secure the loan against your vehicle. If you are concerned about potentially losing your vehicle, you can always consider a guarantor loan.
Similar to joint credit cards, the guarantor acts as a form of security. If you are unable to repay the loan, the guarantor will make the necessary payments.
Because it is your first loan, you might be hit with a higher interest rate. To combat this, you can make higher payments than stipulated to reduce the overall balance that interest can accrue on. Or you can even consider making an early settlement.
Payment of rent & utilities as proof of good standing
If all of the above does not pan out, you can always consider asking your landlord or utility company to provide a report of your positive repayment history to the credit association. This might help you to gain access to personal loans and other forms of credit.
Tips to ensure you build and maintain a good credit history
- Always maintain all loans by paying on time.
- Make extra payments towards credit card debt.
- Keep your number of loans and credit cards low.
- Keep payday and short-term loans to a minimum.
- Avoid making multiple loan applications within a short time frame.
- If you are rejected for a loan do not make another loan application until you repair your credit or improve your finances.
- Do not close or cancel multiple loans and accounts within a short space of time.
While starting your credit journey might be scary, this does not mean that it is impossible or that it should be delayed. Millions before you have gone through the same struggle and lived to tell the tale. Start your journey the right way and pave your way to a bright financial future.