How do you start to build a good credit score?
A credit score is a relationship you have for life - or at least from the moment you open your first credit account - and we all have to start somewhere.
One common misunderstanding seems to be that everyone is automatically assigned a credit score when they hit a certain age, like 18. That’s not true. Your first credit score comes when the first credit enquiry about you is made - which is when you apply for your first credit, such as a credit card, or open a utility bill or cell phone account in your name.
Credit scores, which are determined independently by New Zealand's three credit reporters (also known as credit bureaux), range between 0 and 1000, and most people will start out their history somewhere in the middle, ranging from 300 to 600 depending on the types of credit they have and how they use it.
The good news is it’s never too early to start working at building a better credit score. Some simple ways to do that are:
Demonstrate financial control. To begin with, consider keeping your credit card limit fairly low. Your credit file doesn't show the balance of your credit card account just the limit - that is the amount of credit available to you. The higher the limit the more it appears you may be in substantial debt with less chance of paying it off. A lower limit may appear more manageable and more likely to be considered a lower risk.
Pay on time. This one might seem obvious but building a strong repayment history from the beginning is important. Pay the full amount owed for utilities and loans on time. With credit card accounts try to pay the full balance owing each month if possible, on the due date.
Don’t apply for multiple credit accounts at the same time. Or check whether the resulting credit enquiry will be a "hard footprint", which may impact your score, or a "soft" enquiry, which allows a creditor to check your history without impacting it. Each hard footprint application will impact your credit score, and too many requests for credit tends to make you look a bit desperate. Do your research on which loan or credit product seems best suited to you before applying and triggering a credit check which impacts your score.
But don’t avoid credit altogether. It might seem odd, but living completely debt-free without any utility accounts in your name won’t improve your credit score. Your credit score is based on your behaviour and history. If you don’t have any demonstrated credit behaviour it can’t help your score. By having debt or credit, personalised to your financial circumstances and that you can afford, you demonstrate positive credit behaviour. That behaviour allows lenders to assess your credit risk. It may be useful to have a line of credt open, even if you don't use it. Repayment history disappears from your credit file after 24 months and credit enquiries drop-off after five years, so it is possible for even a well established credit history to disappear entirely.
Get older. If you’re young and just starting to build your credit history this one might be annoying. But generally you’re more likely to improve your credit score as you get older. It really just comes down to having a longer history, which provides the credit bureaux with more information to more accurately assess your risk. Although it's probably even more important, to remember the five-year time frame as you get older too. As you pay down debts such as a mortgage or credit card it may be a good idea to keep them open, so you retain an active credit history.
Check your score. It’s a good idea to check your score every six months or so, and request your credit history at least once a year - more if your score suddenly dips and you’re not sure why. Check your credit file for anything unexpected or surprising. If you think it’s an error you can report it to the credit bureau for investigation. It’s also a good idea to check both if you’re planning to apply for a loan or other types of credit.