Ask An Adviser - Should I Borrow Funds To Establish A Good Line Of Credit? (1)

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Ron Pratap

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Hi Gaile,

Thank you for your question, as a good credit history is important for your financial well-being because it can make it easier for you to get loans, credit cards, and better interest rates when negotiating with the bank. It is first important to understand how to establish a good line of credit which to get a good ‘credit score’. Your credit score ranges from 0 to 1,000 (some credit reporting agencies go up to 1,200). It depends on your payback history, credit application frequency, and number of lines of credit.

Credit scores are used by banks to determine loan approval. Your loan application chances improve with a higher score and may enable you to also get lower rates.

You should consider if borrowing money is required by you before you do borrow, as you may be paying unnecessary fees, charges and interest if funds are not needed. Building a good credit history doesn’t involve just borrowing money and while you are starting from scratch, there are a few things you can do to build up your good credit history. Here are steps you can take to build and keep a good credit score:

1. Consider a credit card- You don’t have to borrow money to build up a good credit rating. Consider applying for a low-rate or no-annual-fee credit card and make payments on time to build credit. Just remember any amounts owing at the end of the interest-free period will attract interest, so have a system and the discipline to pay off your credit card at the end of every month, finding one with frequent flyer points may also offer additional benefits for you if you make regular purchases.

2. Understand what your credit history is- There are several companies who offer paid or free credit reports, you can usually obtain these once a year for no charge by requesting a report and this will give you an indication of your current rating and how potential lenders will assess you. It is best to ensure all the information is correct and attempt to resolve any potential issues. Mistakes or errors can be corrected with the credit report agency or institution that may be impacting your credit assessment. Fraud and identity theft can also be picked up if it appears on your report to ensure your report is accurate and up to date.

3. Ensure any existing direct debits or repayments are paid on time- Making sure any regular payments such as rent, utilities, gym membership, insurances, credit card repayments are made on time. Recent credit reporting changes give lenders a fuller picture of your credit history, not only your infringements and defaults. Your credit report shows your credit product applications, payback amounts, and on-time payments, giving you more chances to impress lenders if you manage your money well.

4. Not applying for too many forms of credit- You shouldn't apply for too many credit products. Each time, you mount up 'hard enquiries.' Hard enquiries are documented on your credit report when a potential lender seeks your credit history before doing business with you.

One hard question isn't a problem. Too many in a short time can hurt your credit score and give the lender the impression you are desperate for funds or pretty bad with your money.

In summary, getting a good credit rating doesn’t just mean borrowing additional funds, you can do things such as ensuring all your information, contact details, identification and specifics are up to date to product and service providers as well as financial institutions. Close any recurring payments or accounts that are no longer in use to ensure they do not leave your bank balance going into into debit.

If you follow the above steps, you will ensure you are putting yourself in a better position to apply for a loan in the future. If you are unsure of making an enquiry with a financial institution, speak with a mortgage broker or lending specialist and look at a lending pre-assessment to check if your financials are in order before applying for a loan.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

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