Just as a journey of a thousand miles begins with a single step, an excellent credit score can begin when you’re young. Your track record of managing money can have long-lasting repercussions later in life, making it important for young Australians to start building positive credit habits as soon as they are able.
What is your credit history?
Your credit history is a record of your financial activities, specifically of borrowing and repaying money. This information is collected by credit reporting bureaus in your credit file and used to calculate your credit score.
Your credit score or credit rating is a measure of your money management abilities. Australians with a history of borrowing and repaying money on time are more likely to have high credit scores, while Australians who regularly make late repayments, or who have defaults or bankruptcy in their credit history, are more likely to have low credit scores.
Banks, lenders and other credit providers conduct credit checks when you apply for credit products, such as personal loans or credit cards. Your credit score is used to quickly assess whether you’re likely to make your repayments on time, or if there’s a higher risk that you’ll default.
It’s not just banks and finance companies that use credit scores – telecommunications companies and energy retailers also conduct credit checks when you apply to become a customer, so they can get an idea of whether or not you’re likely to pay your bills on time.
Good or excellent credit customers are more likely to see their credit applications quickly approved and may be eligible for special offers with lower interest rates or fees, or higher borrowing amounts.
Borrowers with low credit scores may find it harder to borrow money – their applications may take longer to process while the lender conducts thorough checks, and they may need to fulfil tighter eligibility criteria, or pay higher rates and fees.
Bad credit borrowers could find that their credit applications are declined altogether, unless they’re able to provide extra security to help offset the lender’s financial risk.
When does your credit history start?
Australians don’t automatically start with a credit history. You also don’t apply for a credit score like you do for a tax file number.
Instead, your credit history begins from the first time a credit event is recorded and reported to a credit bureau. This is typically sometime after you turn 18, due to the age limits on most credit products.
A credit event doesn’t have to be applying for a credit card or a personal loan. It can be something as simple as applying for a post-paid phone contract, or putting your home’s phone, internet, or electricity into your name. When the provider makes a credit check as part of your application, this will be the start of your credit history.
Having no credit score isn’t the same as having bad credit, but it can make you something of an “unknown” to credit providers. This can sometimes mean you won’t be able to access some of the best offers from some credit providers (as well as phone, internet and energy retailers), until you’ve established a good or excellent credit score.
The length of your credit history can be a factor in determining your credit score, so the earlier you can establish your credit record, the more you may be able to potentially grow your credit score in the future.
How can you build your credit history?
Apply for manageable credit products: Some banks and lenders provide special products intended to serve as your first credit card or personal loan. These may charge relatively low interest and fees, though they may not offer as many of the bells and whistles such as reward programs.
Limit your credit applications: Making too many applications for credit over a short period of time can make lenders think that you’re struggling to manage money and are desperate for credit. This could see your loan application rejected and risk damaging your credit score.
Keep up with your bills and repayments: While paying a bill or a credit repayment a day or two late shouldn’t be recorded in your credit history, a significantly overdue bill (e.g., over 14 days late) will be recorded as a Late Payment in your credit file, potentially affecting your credit history. If you fall further behind in your payments (e.g. more than 60 days late for a payment of over $150), you risk a Default appearing in your credit history, which can more seriously affect your credit score.
Consider keeping credit cards open: Even if you don’t use a credit card often, the longer you can keep it open with no negative events, the more it could potentially improve your credit history. Just beware of any fees you may need to pay, and the temptation to spend up big on your credit card.
Maintain some stability: Your job and your address are also recorded in your credit file, so switching careers and moving house frequently could risk lenders seeing you as unreliable.
Check your credit history: Many providers allow you to check your credit for free. This gives you a better idea of how lenders see you when applying for credit. If you find errors in your credit file (they do happen), contact the parties involved to get them corrected.
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