If you want to purchase your first car or first house, it is important to know that you cannot achieve this without a good credit score.
The first thing you need in order to gain a credit score is a credit card.
You will not be issued a credit card unless you earn a regular salary and, can provide proof of this with a payslip. This ensures the lender that you will be able to pay back the amount owed as well as the interest charged.
What is a credit score?
A credit score is a measure of the creditworthiness of a person. It is represented by a numerical value and is determined based on how the credit card holder performs. Meaning whether or not they pay back loans on time, the amount and types of credit they take out, how frequently they use credit and their debt to income ratio.
This helps lenders know who they can and can't give loans, bonds, and other products and services to. This ensures the stable running of the Australian economy as banks cannot lend money out that they’ll not receive back tenfold.
What is a credit card?
Much like a debit card, it’s a plastic rectangular card that’s used for financial transactions. The difference is that where a credit card is making use of money that you don’t currently have, a debit card uses money you have.
It’s issued by financial companies and they make money when the credit card holder uses the credit offered with the agreement that they’ll pay back the amount owed plus interest.
Interest will be an amount set by each individual finance company which can be a fixed amount or a variable amount. The only catch to obtaining a credit card is that you must be working, earning a regular salary, and, have good to decent credit.
How to build a good credit score?
Having a decent credit score is essential, as without it you’ll be unable to buy a car or house at competitive rates. Banks will look at your credit rating before deciding whether or not to lend you the money. So, it is important for you to create a good credit score for yourself. And this is how to do it.
- Remember to only borrow money that you know you can pay back. This shows lenders that you know exactly how to avoid debt and that you can borrow responsibly.
- Remember to pay your debt on time as this shows banks and lenders that you’re punctual and can afford to pay back the loan.
- Remember to pay your balance in full each month.
- If you really can't pay the balance each month, let your provider know.
Your credit score will be based on your personal and financial information such as the amount of credit you have been approved for, outstanding amounts, whether you make payments on time, and such related topics. It will also specify the type of account you have, your loan inquiries, your limit, and repayment history.
How you can get a bad credit score?
In order to maintain a good credit score, you need to understand how to get a bad credit score. This will help you avoid bad habits and help maintain an improving credit score.
- If you apply for loans or new credit cards it could damage your credit card history and you can be refused.
- Changing credit card limits or loans will affect your history.
- Late or no payment.
- Paying off your card and then immediately closing the account.
How to improve a bad credit score?
It is important for those with bad credit scores to know it is not the end for them. They can still improve their credit score and turn things around. It might take time but without a good credit score, it is difficult to have a good quality of life. This is how to improve it.
- Pay off your credit card balance in full every month.
- Reduce your credit card limits.
- Do not apply for new credit cards. Only one at a time.
- Pay off your balances on time each month.
- Consolidate credit cards in order to reduce credit.
- Keep unused accounts with a good track record open.
- Pay more than the minimum each time you pay.
Upon improving, banks will reward you for good financial habits. Always practice positive financial habits. Being responsible with money will increase your chances of approval.
Types of credit cards to help with credit history
- Low-interest rate cards - cards with interest rates between 8.99% per annum ad 14.99% per annum are considered to be low-interest rates.
- First credit cards - these are cards that people with no experience take out so that they may learn how to properly use a credit card.
- Low credit limit - limiting the maximum amount of money you can spend will reduce the risk of debt.