Applying for any financial product means that your credit history grows. From your first debit card to repayments on your car or mortgage, all lenders look at your recent history before they decide to offer you any finance.
Before you fetch some finance, we sniffed out the best ways to build your credit history.
Maintaining your credit file is important to lower your risk profile to banks or any financial institution willing to lend you money – ultimately getting you a better deal on further finance.
While a ‘no deposit, take home today’ deal may look tempting, you may be adding hundreds or thousands in interest fees to the life of the loan, all of which you could have saved by biting the bullet and paying a bigger deposit upfront.
By shortening the life of the loan you avoid paying interest on the principal amount (i.e. the amount that is actually deposited into your bank account), which can save money in the long run. Of course, once you’re financed – buckling down and repaying your loan regularly shows that you can be disciplined and increases your chances of obtaining further finance down the track.
Choosing types of finance
Not all finance providers are created equal; some are higher quality than others. For example, the big banks and credit unions are seen as prime lenders – it means their loan business is very strong and they are in the best position to offer higher amounts with lower interest rates. The trade-off means that they’re often much stricter to who they offer finance to – the accountants working the bank are hesitant to give out loans to those whose history suggests that they may have trouble paying back any money.
Because banks have such rigid lending conditions, many set up or buy into a secondary business specialising in finance. These lenders have the benefit of being supported by a large bank, but the flexibility to offer finance to people who may not fit into the banks lending criteria.
Subprime lenders are businesses set up to offer finance to a broad range of people –their lending criteria is usually the least strict, but their conditions are usually more restrictive for borrowers. Higher interest rates, fees and less flexible conditions around the terms of your loan, mean that it is usually only for borrowers who are trying to get a leg up on their credit history – if a subprime lender is all that’s open to you, but you can prove that you can borrow responsibly and repay your loan it may help in the future.
Payday lenders are the least customer friendly finance lenders in the industry. Because they’re operated by companies whose main arm isn’t in finance or insurance – they are seen as a pure profit business, charging incredibly high interest rates and penalty fees with terms and conditions that give you very little wiggle room in case you need to change your repayments or modify your loan.
On top of this, paying back a loan from a payday lender doesn’t positively affect your credit file – but if you fail to make each payment on time and pay out the loan it will record as a negative to your credit history: a lose-lose if your borrowing and best avoided if you can.
Staying on top of your finance
If you apply for finance, lenders first look at your other obligations: even if you’re earning a million dollars, if you’re spending $999,990 on keeping the other parts of your life running – then a lender would have to ask how you’re expected to take on the expense of servicing a loan.
For example, while you might see your credit card as something incredibly convenient, a lender sees a potential sign of stress down the line.
Even if your balance is paid, all it takes is an unexpected bill (or shopping trip) and suddenly you’re paying back a couple of grand at 20% interest – on top of the regular bills that don’t stop coming in. Worse is if you’re just paying the minimum repayment each month on your credit card (or multiple credit cards!) This is a bad habit to get into, as it will take you so much longer to pay off the balance and just pour more money in interest fees to your credit card provider.
If you must have a credit card, try and charge amounts that you can pay back in full every month (or however long before the balance is due.) If you can’t repay the whole balance, try and make more than the minimum repayment amount – this will help to make a bigger dent into the balance as well as counteracting the interest being charged.
Having a stable income and residence is another key factor in whether a lender chooses to give you a loan. Over three years in the same situation is ideal, as it suggests that you’re less likely to make rash financial decisions and are able to maintain a steady lifestyle – you’ll be deemed to be less risky to lenders.
Not everyone can have a perfect credit history, but that doesn’t mean that you’re locked out from borrowing any money. A default listed on your credit file can be treated by making arrangements to repay the amount owed, even a payment plan shows that you’re trying to be more responsible with your finances.
Speaking of your credit file, it’s important to stay on top of it – as lenders will rely on the information in there when they’re making a decision about your loan.
You’re allowed to access your file for free once a year just to check – or you may access within 90 days of being refused credit that you’ve applied for, or if you’ve lodged a correction and have been advised that your file is amended (for example, you’ve paid a default or had an incorrect credit enquiry removed.)
Even if you’ve been thorough with keeping your finances up to scratch, some credit providers (like phone companies) are indiscriminate in throwing defaulted accounts straight to collection agencies whose records may get confused with someone with a similar name, or an account that was opened at the same address by someone else – these are easy enough to correct, but you’ll have to fight it out over the phone with the collector and prove that it wasn’t you (for example, your address is different or there’s a different spelling of your name.)
For your peace of mind, a once-a-year check of your credit file will help you stay on top of any changes that you weren’t aware of, and help you to strengthen your credit history moving forward.
The CarBeagle team help sniff out the best finance options for you, in order to keep your finance costs manageable and find a deal that works for you!