No Credit Score? How to Build a Credit History From Scratch

No credit history? No problem! You can build a credit history from scratch.

Starting to build a credit history can be daunting at first. Where to start? What to do first? We’ve got your back! Honestly, it’s not as hard as you may think and it will only take a few months until you’re fully set up!

 

First of all, kudos to you that you think about your financial future that early! Let’s go on this exciting journey together and build the credit score you want! First things first: Not having a credit score at all is better than having a negative score. If you need to build your credit score from scratch, you will need a few months to get there but you will see positive results quickly. Repairing a damaged credit score, on the other hand, can take years.

The goal: Aim for the best! Your goal should be an exceptional credit score! (Of course, good does the job, too.)

Not having a credit score yet means that the major credit bureaus don’t have any data about you listed just yet. Your goal is to build a history of positive entries in your file that allow you to apply for anything you want in the future.

Ready to get started? You will need a little bit of patience until you see results. Experian, one of Australia’s big credit bureaus says that it takes between 3 and 6 months until they have collected enough data to calculate a score for you. So make your next 6 months count (and all your financial decisions afterwards)!

Credit Score Basics

What is a credit score?

How does it work?

Why do I have no credit history?

How do I find out about my score?

Credit Score Basics:

Before you dive deeper into your finances, it’s important to understand how your credit scores work. Lesson number one: You have more than one credit score. That’s right, there are multiple bureaus that collect information about your financial behaviour. In Australia they are:

• Equifax
• Illion 
• Experian 

Each of them has their own reporting with slightly different parameters. That’s why your score can vary, depending on which report you’re looking at. Not everyone reports to all three of them in the same way and your information might be processed differently.

What is a credit score and how does it work?

Your credit score is a number between 0 and 1,000/1,200 (numbers vary slightly for each credit bureau) that reflects your creditworthiness. It is based on your credit report, a collection of your credit data reported to this date. Your points place you in different categories:

Experian (Score: 0-1,000)	Equifax (Score: 0 – 1,200)
Excellent: 800-1,000	Excellent (81% – 100%)
Very good: 700-799	Very Good (61% – 80%)
Good: 625-699	Good (41% – 60%)
Fair: 550-624	Average (21% – 40%)
Below average: 0-549	Below average (Bottom 20%)

(Source: Experian)

(Source: Equifax)

While you should aim for an excellent credit score, reaching “good” is often enough to apply for a loan with good conditions.

If you apply for a mortgage, a personal loan, or a credit card in the future, your potential lender will perform a credit check and base their decision on your credit score. Higher scores can score lower interest rates and better deals while loan applications with low credit scores may get higher interest rates or even get rejected.

What factors affect your credit score?

If you have to build your credit history from scratch, you may be wondering what your credit report is made of. Let’s have a closer look at its components.

Your credit score consists of a mix of things, including your previous payment history and how much you owe in comparison to the maximum amount you could borrow. You may be surprised to hear that borrowing money isn’t a bad thing for your credit score, as long as you pay it back on time.

Your credit score consists of multiple factors:

• Credit Accounts
• Repayment History
• Defaults
• Credit Applications
• Bankruptcies and Debt Agreements
• Credit Report Requests

Credit Accounts

If you have applied for credit in the last 2 years, it will be listed here. What type of credit did you have? Who is your credit provider? What is or was your credit limit? When did you open the account, when did you close it? If you applied for joint credit, the co-applicant would be listed as well.

This is something you want to consider on your journey to a healthy credit score: A healthy mix of different types of credit will give you a better score. This could be e.g. a personal loan, a car loan, and a credit card. Simply having multiple credit cards won’t give you the same effects on your credit score.

Tip: Wait a few months between applications if you are in the process of establishing a good credit mix. As previously mentioned, multiple hard inquiries in a short time will negatively affect your credit score. Additionally, you want your score to recover before you send your next inquiry to get you the best interest rates possible.

Repayment history

Your repayment history reflects if you have paid your debt on time. It is an extremely influential factor for your credit score. Your credit report will include:

• Repayment amount
• The due date for payment
• How often you have paid and if your payment was on time
• Missed payments (payments not made within 14 days of due date)
• Did you make missed payments later?

Tip: Set up automatic payments to ensure that you always pay your debt on time. If you can’t set up autopay, set a reminder in your calendar. Missed payments can hurt your credit score for years.

Defaults

A default is a non-payment of debt of $150 or more. This includes any phone or utility bills, credit card bills, or loans that you didn’t pay on time or in case of a clear out. (A clearout = when a credit provider can’t contact you at all).

A default will be listed if the payment is 60 days or more past its due date or the provider has asked you by phone or in written form to make your payment.

Credit Applications

When you apply for any form of new credit, a hard inquiry is registered. This can have a short-term effect on your score. Too many hard inquiries at a time will negatively impact your numbers. Your credit reports lists

• Number of Applications
• Total Amount of Credit
• Loans

Tip: Be smart and let some time pass between inquiries. That doesn’t apply if you are shopping around for the best car loan or mortgage. Most credit bureaus will register multiple inquiries within a certain period of time as one hard inquiry to give you the chance to look for the best deals.

Other factors that impact your credit score

While you are building your credit score from scratch, you won’t have to worry too much about these things. However, it’s good to know what could impact your score down the track!

• Public records such as bankruptcies
• The number and residency of credit accounts you have applied for
• Cross-referenced files (additional credit files that contain similar information but vary in data-points)
• Default listings with debt collectors

Why don’t I have a credit history?

So far, your credit history is blank and you are wondering why? This can have a few reasons. If you just turned 18 and most of your bills have been paid by your parents, you haven’t had a chance yet to accumulate credit history. Even if you are older, chances are that you never applied for credit yet and therefore, the relevant credit bureaus don’t carry data about you. If you have stayed off the grid until now, it is about time to change that!

How to build a credit history from scratch

Most importantly, you will have to apply for accounts that keep reporting back to the major credit bureaus to provide them with data. And don’t worry if you don’t see results straight away. It takes a few weeks and enough supporting data to calculate your first credit score. With Tippla, you can keep track of your credit score and see it grows over time.

Step one: Open an Australian bank account

Let’s start your credit history from scratch: If you don’t have your own bank account yet, that’s the first thing you want to look into. A long-held bank account may allow you to apply for a credit card down the track. While it may not help you immediately to improve your credit score, it definitely will in the future. A bank you had an account with for some time may be able to offer you a credit card based on your previous relationship. Having a bank account will also allow lenders to verify your residency once you start applying for personal loans. You will often be required to provide multiple documents that have your address on them.

Additionally, a bank account is necessary to set you up to manage your finances well and on time.

Step two: Proactively provide information

You can proactively approach your credit bureau to provide information if your data is currently left blank. While you can’t just send them an email to get listed, you can send them

• a document to prove your identity
• a document to prove your address.

Updating your information proactively on time will be useful for future reference. E.g. if you apply for a new credit after you moved house and your address is not matching, this can affect your credit score by creating a cross-reference or even a new credit file.

Now there is some information about you in the system. Just because you never had a credit card or a loan doesn’t mean you don’t have a positive financial history. Let’s start your efforts to build a credit history from scratch. If you live on your own, you may be reliable for paying rent and utilities. By making those payments on time, you have already proven that you can manage your finances well. If you just start to live on your own, keep in mind that paying your bills on time may affect your credit score in the future. The earlier you start building healthy financial habits, the better.

Paying your bills on time hasn’t been part of the reporting for a long time. A failed payment will be reported if your rental agency or service provider hands the case over to a collection agency or takes legal action against you to recover their due amount.

Step 3: Apply for a credit card

While you may not be able to apply for a regular credit card with no credit score, there are other options available to you.

• • First credit card. Many banks offer specific credit cards for people that are just starting out with their financial life. They come with low fees, low interest, and
  • Guaranteed approval credit card. As the name suggests, you will get approved for this credit card even if you don’t have a credit score yet. It comes with a higher interest rate, a lower credit limit, and less extra features. However, if you pay off your spendings every month, the interest rate won’t matter and can help you build a positive credit history.
  • Use a co-signer. Adding a co-signer on your application can improve your chances to get approved. However, some big banks won’t allow it. Be careful who you choose, a co-signer will be legally responsible for any debt you accumulate on that card and will equally be able to access your funds. A co-signer should be someone you trust like a parent or a close family member.
  • Open a joint credit card. On a similar note, you may have better chances to open a joint bank account with a partner or a family member if they have a good credit rating. A joint account comes with joint responsibilities but also joint benefits. Did you move into your first place? How about a joint credit card to pay for house expenses? You will all benefit if everyone treats it responsibly.
  • Be an authorized user for some else’s account. If you want to build a credit history from scratch, this is something you can always do: Most credit cards allow you to add authorized users. They are different from a co-signer because the responsibility to pay the bills stays with the primary owner of the credit card.

Step 4: Request a credit limit increase

This step will be a few months down the track. You’ve got your credit card, you made a few purchases, and you repaid on time. Once you have proven that you can manage your credit, it’s time to up your game: Ask your bank to increase your credit limit. How is this affecting your credit score? Having a higher credit limit will lower your debt to credit ratio and improve your score.

Step 5: Work on your credit mix

Again, a few months in you can reconsider your options. Your credit score should show up by now and is hopefully looking okay. It’s time to think about other credit options. A healthy credit mix contains both types of credits:

• Revolving credit. A revolving credit doesn’t have an end date and is a consistent line of credit like e.g. a credit card. It doesn’t have a specific limit but comes with minimum payments each month.
• Instalment credit. On the contrary, instalment credit has a set amount and an end date. Examples are personal loans, student loans, or car loans.

Credit bureaus recommend having a blend of different credit types in your credit history.

Let’s say you are considering buying a car, it may be sensible to look into your loan options even if you could afford to pay the full price. Starting your credit history with a car loan may be a good idea: Most car loans are secured loans. Your purchased vehicle acts as security against the loan and allows your lender to offer you a better interest rate.

However, it is possible to build a credit history from scratch with a good score even if your credit mix consists of one sort of credit only.

Actions that positively impact your credit history over time:

• You can ask your bank for a small overdraft. It allows you to borrow extra money from your bank account. While you won’t actually have to make use of it, it will still impact your credit score as it is a form of credit.
• Make sure all your utilities and household bills are in your name. While it may be difficult to set up all of them under your name if you don’t have a credit score, it will get easier over time. It’s important for your future history to have them in your name.
• Always pay direct debit when possible.
• Don’t apply for multiple credit accounts at the same time. If you are currently working on building a credit mix, space out your applications. Each application will create a hard inquiry that may cause your credit score to drop for a few weeks.
• You don’t have to pay interest on your credit card to help your score. In fact, it is better to pay off your credit debt straight away each month. If you pay off what’s due you’ll build up your credit history without having to pay extra.
• If you do use your credit card, keep your credit utilisation below 30%. That means if your credit limit is $1,000, you shouldn’t have more than $300 left open at the end of the month.
• Don’t close accounts unless you really don’t use them anymore. The longer you own an account, the better for your credit history.