You may have heard of credit before — basically, it's money you use and spend, usually on a loan or credit card. When you take out credit, you're opening a line of borrowing that extends into the future, building a case history of you as a borrower. This helps lenders, credit card companies, banks and other lenders decide whether to lend you any money.
But how do you know when to start borrowing? More importantly, how do you do it right?
Understanding credit reporting.
Credit reporting relies on algorithms and lots of data gathered from everyone who's ever borrowed credit or been paid — essentially everyone. This data provides a benchmark for what a good or bad action is in terms of taking out credit.
Things are pretty obvious, like failure to pay back what you owe. Lenders and providers want to get their money back, so any action which shows that you can't repay is terrible. However, repaying on time and in full is a positive action. Other things are harder to grasp unless you already know what providers want.
Having a good credit line increases your chance of getting credit approval and lower interest rates. Essentially, when your score is high, you've proven you show yourself to be less of a risk to lenders.
What are some things I can do to improve my line of credit?
Keeping a good line of credit open is based on many things, aside from making timely repayments. These include:
Length of time an account is open.
To get a good line of credit going, you need proof of repayments. That doesn't mean you should rush out to secure a loan now. But when you start a new line of credit, keeping that new account open for a while will help build your score — so long as you keep up with the repayments.
If you can pay more than the minimum required amount for each payment date, you can improve your score further. But check with your lender first on the conditions of your loan — some will want you to repay exact amounts, so they get the same interest stated in your agreement. You may get fees for finishing your credit instalments too early in those circumstances.
The more accounts you have open, the more repayment examples you have going. We suggest this with an edge of caution, though — because having too many accounts available may overstretch you and result in one payment date slipping past the due date. Because everyone is has a different credit lifecycle based on what they can afford, there's no one answer here. However, most people may have a home, auto and personal loan on the go, with one or two credit cards. But don't feel any pressure if you can't meet all these — it's really about borrowing within your means.
While lenders like to see you repaying considerable amounts, they also want you to show some restraint on what you borrow. This is particularly true of credit cards, which continually approve a certain amount of credit per month.
Generally, utilising around 30% of what you can afford to borrow is ideal and will count the most towards your credit score. So if your credit limit is $500, aim to take out no more than $150 per month.
If you're struggling to keep a good line of credit open because of commitments to bills and other loans, then we've got some tips that may help. Check out some of our other blogs on budgeting, consolidating debt or boosting your credit starting.
Everyone has to start somewhere, so if you're already struggling with one account, you don't need to follow all these tips to the letter. The best thing you can do on credit is to pay your agreed — and the absolute worst is to start missing payments. Let finding repayments on time be your benchmark before thinking about other ways to increase your credit score.
A good line of credit shows lenders or providers you can meet your obligations for repayment once you've established that you can look at trying to keep open better, more prolonged or multiple lines of payment, depending on where you are in your credit journey.