Highlights:

• Building a positive credit report and strong credit score in Australia from an early age is crucial for accessing future financial opportunities like renting or buying a car.
• Your credit score can be impacted by your repayment history for a range of accounts, including mobile phone plans, utility bills and Buy Now Pay Later accounts.
• Young Australians can improve their credit score by paying bills on time, limiting credit applications, and regularly checking your credit report.
   

Credit for beginners

As a young Australian, the financial habits you're forming right now can have a huge impact on your financial independence. When the time comes for a rental application, car finance, personal loan or business loan, your success in getting approved can depend in part on your credit score. Your credit score is like your financial reputation. It's a number that lenders and other credit providers use to determine how reliable you are at managing money and repaying debts. 

How is a credit score calculated?

Your credit score is calculated from the data in your credit report. If you’re a young Australian still living at home and haven’t yet applied for credit, you may have little or no credit history. This is often referred to as having a ‘thin file’. Credit reporting agencies in Australia calculate credit scores using their own algorithms, methods and scales. For example, an Equifax credit report gives you a credit ranking of between 0 to 1200. The higher your number, the better your credit score. A good Equifax credit score is considered to be between 661 to 734, and an excellent score is 853 to 1200.

Why you should start building credit early

If you have a thin credit file, you might have trouble qualifying for new loan accounts or may receive less favourable rates. Paying more interest over the life of a loan can end up costing you thousands of dollars.  In contrast, building credit early can help fill out your credit report and help establish a good credit score. The higher your credit score, the more chance you may have of getting approved and getting access to better loan terms.

How young Australians can establish a credit history

Credit building starts with financial literacy. Taking control of your finances as a young person and making informed decisions can help you access more financial opportunities as you get older. You don't need to be taking out big loans to start building your credit score in Australia. You can start with smart, simple habits, such as these:

1. Pay mobile and utility bills on time

Paying mobile, gas or electricity bills late can impact your credit score if they are in your name. A bill that is weeks overdue can be recorded as a ‘late payment’ on your credit report. 

A debt of at least $150 that is overdue by 60 days or more can be listed as a ‘default’ on your credit report. Before a default is listed, the credit provider must send you two written notices. Once you pay the overdue debt, the credit provider is required to  update the listing on your credit report to 'paid'. A serious credit infringement may also be listed if you have a default and haven't had contact with the credit provider for at least six months.

When a default is recorded on your credit report, it remains there for five years. During those five years, potential lenders may look unfavourably on your credit application, as the default indicates you have failed to pay off a debt in the past.

2. Make on-time Buy Now Pay Later (BNPL) payments

Buy Now Pay Later (BNPL) providers in Australia are now subject to the National Consumer Credit Protection Act, and must now operate under similar credit laws that apply to credit cards, personal loans and home loans. This means repaying back your BNPL plans on time is important for helping build a positive repayment history. On the other hand, missed or late payments may be reported and may negatively impact your credit rating, just like defaulting on a credit card or other loan.

3. Apply for a starter credit card

First timers to credit should consider starting with a basic, low-limit credit card. They are easier to get approval for and repaying the outstanding balance off in full each month shows you can manage credit without accumulating debt. A low limit on your card avoids the temptation to max it out and spend beyond your means.

Failing to make your minimum credit card payment can negatively impact your credit score. While a single late payment might not cause significant damage (depending on how late it was), multiple late payments can signal financial stress to lenders, which can have a negative impact on your creditworthiness. It also means you'll be paying more in interest, and it will take you longer to pay off your debt.

4. Space out your applications

If you’ve been declined for credit by one credit provider and you continue to make numerous subsequent applications with other providers, the resulting enquiries on your credit report may negatively affect your chances of obtaining credit in the future. 

Every time you apply for a new BNPL account, credit card or a loan, a 'hard enquiry' is recorded on your credit report. Too many of these in a short period of time can lower your credit score, as it may signal that you are in financial distress.

5. Open a bank deposit account

Opening a bank account in your name helps establish your financial footprint. With your consent, some credit providers can now access transaction data  information from your bank account, such as your rental payments, income, and spending patterns. This data gives them a clearer picture of your ability to handle your finances responsibly, especially if your credit report contains limited credit history information.

6. Check your credit report regularly

You are entitled to a free copy of your credit report in Australia once every three months from Equifax or another credit reporting bureau. Checking it allows you to track your progress and correct any inaccuracies. At Equifax, we also offer a subscription service that can  automatically notify you of any key changes made to your credit report, such as when a lender accesses your report.

Taking these steps early can help you establish and improve your credit score over time. Remember, building a strong financial reputation takes patience and discipline. Start today by setting up your credit report for lenders to see you in a positive light.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.