Amanda Smith
Georgia Rose
Athena Cocoves
Access to credit can help you reach your financial goals, like getting a mortgage to buy your dream home or securing a loan to launch your business. But people with low credit scores often struggle to get approved for credit, and tend to pay more in interest because they’re viewed as riskier consumers.
The good news? Learning how to build your credit score isn’t as complicated as it may sound. Just a few adjustments to your financial habits can help you boost your number and get you closer to your goals.
Key takeaways
Here are some guiding principles when it comes to building and maintaining a good credit score.
- Only borrow what you’re confident you can pay back.
- Avoid relying on credit to fund a lifestyle.
- Treat your credit card as if it were cash
- Always pay your bills on time, even if it’s just the minimum payment due.
- Check your credit score and credit report at least once a year.
6 ways to build your credit score
Before you start, order a free credit report from one or more credit bureaus so you know exactly what your report contains and what you need to do for your credit rating. You can get a free copy of your credit report every three months.
You can also check your credit score as many times as you wish. Moneysmart, the government website, suggests contacting one of the three credit reporting agencies to get your score, or finding a third-party provider on the CreditSmart website. As you increase your credit score, continue to make regular check-ins to help you stay on track and monitor your progress.
🤓 Nerdy Tip
It’s free to see your credit score, so avoid any provider that asks for payment details.
1. Check for errors and fix mistakes
Review your credit report carefully and check for potential mistakes or signs of fraud. This could look like an unfamiliar credit card account opened under your name, or a missed payment you know you paid on time. Contact the credit bureau to repair the error if you notice something off.
2. Pay your bills on time
A quick way to stay on top of your bills is to make a note of their due dates in your calendar. Even better, consider setting up automatic payments or direct debits. Be sure not to let your bank account drop below a certain amount if you have your bills on autopay.
Paying your bills in full is ideal, but if you don’t have the funds to cover the balance, at least pay the minimum amount due. Also make sure to know the interest-free periods for each provider so you can avoid a default charge if you miss a payment. Every default charge is a knock to your credit score.
3. Deal with unpaid debts
Unpaid debts can accrue interest and become unmanageable, leading to missed payments and defaults, which can hurt your score. The best way to deal with debt is to stick to a repayment plan that works for you. After all, debt isn’t inherently bad. Your mortgage payments, if paid on time, show lenders you are responsible with credit.
To start paying down debt, consider the avalanche or snowball methods:
- The snowball method of paying down debt requires you to target the smallest debt first. The aim is to knock off the smallest debt to build up confidence in the quickest possible way.
- The avalanche method requires you to pay off the debt with the highest interest rate first. This can save you money in the long run and give you extra funds to pay off the smaller debt.
4. Avoid applying for new credit
While repairing your credit score, you may want to avoid applying for new credit as to minimise the number of credit enquiries on your report. Multiple credit applications can make you look overly reliant on credit. If you can consistently manage the credit you have in a responsible manner, the better your chances are of improving your score.
5. Lower your credit card limit
Lower the limit if you’re having trouble managing credit card debt and are worried you might be tempted to use the credit card while you’re paying it off.
6. Deal with defaults and debt collectors
Don’t be afraid to pick up the phone and speak with your lenders and credit card companies. Negotiate better rates, let them know your situation, and avoid putting off inevitable conversations.
Since July 1, 2022, financial hardship arrangements with your providers can’t be used to calculate your credit score. Organising financial hardship arrangements highlights that you’re taking steps to pay off your debt and, therefore, shouldn’t be penalised. It’s worthwhile reaching out to your lenders to discuss your options.
» MORE: How to deal with debt collectors
How to set a credit score goal
When it comes to credit, aim for the top. Are you planning to buy a car or get a credit card or personal loan? Consider your financial goals and use them to inform your target credit score.
Minimum credit scores guidelines
These minimum credit score guidelines are based on Experian credit ratings.
| CREDIT TYPE | MINIMUM CREDIT SCORE | INCREASED APPROVAL ODDS |
|---|---|---|
| Credit card | 550+ (Fair or above) | 625+ (Good or above) |
| Personal loan | 550+ (Fair or above) | 625+ (Good or above) |
| Car loan | 625+ (Good or above) | 700+ (Very good or above) |
Take these ‘minimums’ with a pinch of salt. Every lender has its own criteria and guidelines, and the credit histories of two ‘good’ scores aren’t always equal in the eyes of a credit provider.
Plus, just because you can get approved doesn’t mean you’ll enjoy an attractive deal. Lenders who approve average — or lower — credit scores usually mitigate any perceived risk with higher interest rates, strict terms and additional loan criteria.
Squeaking through the approval process may cost you in the long run. If you can wait until after you have a good credit score, your patience will likely be rewarded with lower rates and more favourable loan terms.
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