How to build your credit score

If you’re thinking about applying for a loan, your credit score is going to come into the picture. Lenders use your credit score when assessing your credit applications, as it gives them an idea as to what kind of borrower you are.

If you have a good credit score, you’ll likely have a number of options when it comes to applying for a loan and, if you secure a loan, you’re likely going to snag a more competitive interest rate. On the other hand, if you have a bad credit score, your credit options may be limited (if you have any at all). If you do secure a credit product with a bad credit rating, you’ll likely need to pay a higher interest rate due to your riskiness as a borrower.

Whether your credit score recently took a hit, or you just want to have the best credit rating possible - there are things you can do that should build your credit score over time.

What is a credit score?

Before we discuss how you can build your credit score, it’s important to understand exactly what it is and how it's calculated.

Your credit score is a number generally between zero and 1,000 to 1,200 which represents your riskiness as a borrower. The higher the credit score, the better you have been with credit products in the past. Your score is generated based on information on your credit report, and is used by banks and lenders when assessing your credit applications.

There are three main credit reporting bureaus in Australia: Equifax, Experian and illion. You may have a different credit score with each agency, depending on what information has been reported to them. Information on your credit report can include any credit applications, current loans and credit cards, your repayment history (up to 24 months) and so on.

Tips to improve your credit score

There are a few things you can do that should improve your credit score over time. It’s important to note that your credit score is calculated based on information on your credit report - information from up to 7 years ago - so practicing good borrowing behaviour should reflect in your credit rating.

1. Check your credit score/report is accurate

Your first step when trying to build your credit score is knowing what it is. It’s important to check your credit report to ensure all the information is accurate, up-to-date and fair. Even making sure your full name and address are correctly displaying on your credit report is important.

You can access a free copy of your credit report once a year from each credit reporting bureau. They will typically fix any errors for free.

2. Make your repayments on time

When you make late repayments or default on any loans, this information is recorded on your credit score. Making your loan and credit card repayments on time is important when trying to improve your credit score. This shows prospective lenders that you are responsible with your credit, and that you’re a reliable borrower. Since your credit score is calculated based on up to 7 years of information, maintaining good habits like making repayments on time is key.

3. Minimise new credit applications

If you’re trying to get your credit under control, applying for new credit can add an extra layer of difficulty. You may wish to prioritise paying off your existing debts (or at least some of them) before adding more debt to the mix. This can also help you stay on track when making repayments on time.

4. Don’t apply for multiple credit products at once

Generally speaking, submitting multiple credit applications can damage your credit score. If you need to apply for credit, ensure you’re only submitting one application at a time. If you’re rejected, wait as long as you can before submitting a new application. Whether you’re approved for your loan or not is not displayed on your credit report; only that you applied. So be sure to space out new applications as much as possible.

5. Consider using a credit card

If you don’t have any utilities in your name, or any loans or a credit card, odds are you don’t even have a credit score. If you want to build up your credit score, having a credit card can be a good way to do so. If using a credit card, be sure to try and pay it off each month to avoid interest charges.

6. Don’t close old accounts before you apply

If you have a credit card but you rarely use it, don’t close the account before you apply for a loan. This is because it can cause your credit score to drop slightly, and it’s best to avoid this before applying for new credit. Keeping it, without using it, will see it still showing up on your credit report. While this can lower your borrowing power (depending on your credit card limit), it will keep your credit score untouched.

7. Pay utilities on time

While paying loans and other credit on time is important, paying your utility bills on time is important too. This can include water, electricity, internet, gas or any other utilities. If you don’t make your repayments on time or at all, your provider can refer you to a debt collector and report you to a credit reporting bureau, which can affect your credit score.

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