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How to build good credit history with a credit card
Want to build good credit history and improve your credit score? Read this guide to find out how a credit card can help.
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Your credit report contains information about your financial history including credit limits, repayment history, loan applications and any defaults you may have had on your accounts. When used responsibly, a credit card can demonstrate positive financial habits and improve your credit score. As banks and credit providers review your credit history when you apply for a product, a good credit history with examples of responsible money habits can increase your chances of approval.
To get your finances in shape, you can use this guide to understand how you can use a credit card to build your credit score in Australia.
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How do credit cards affect your credit history?
Your credit report includes details of a wide range of financial products you apply for or use over the course of your life. This includes credit cards, loans, mortgages and utility accounts such as phone plans and gas or electricity accounts. If you have a credit card, the following details will be included in your credit report:
- The type of account. Credit cards and loans are generally considered the most “valuable” types of accounts to have listed on your credit history because they give lenders an indication of your ability to manage and repay a line of credit.
- Loan inquiries. Applications for credit cards and loans are considered “new loan inquiries”, which are also listed on your credit report. Several applications for credit in a short time period can hurt your credit score and be a red flag to lenders reviewing your history. However, credit enquiries spread out over time can demonstrate your ability to successfully apply for and manage credit products.
- Credit limit. When you get a credit card, your credit limit is also listed on your credit report. These details help lenders see how much access you have to credit when considering applications for loans and other products.
- Monthly repayment history. Your credit history lists if you pay your credit card on time and whether you pay the minimum or full amount each month. This information also gives lenders an idea of your ability to make timely repayments.
Keep in mind that these are just some of the details listed on your credit history. You can learn more about what else is included with our guide to understanding your credit report.
How can I use a credit card to improve my credit history?
Every time you apply for a credit card or use your card, there’s the potential that it will impact your credit history. You can use this to your advantage and build good credit in the following ways:
- Only apply for one card at a time. Having too many credit card applications can hurt your credit score, so make sure you compare credit cards and then apply for the one that best suits your needs at the time. If your application is accepted, don't apply for another card straight away. Instead, take some time to improve your credit history by demonstrating positive payment behaviours with other accounts.
- Make repayments on time. Paying off your credit card balance on or before the due date shows lenders you are responsible with your accounts. Depending on the credit card you choose, you could set up automatic payments from a nominated bank account.
- Pay more than the minimum. You're only required to pay the minimum payment on your credit card each month. This is usually only 2% or 3% of the amount owing, which leaves the rest to attract interest. If this grows into unmanageable debt, this could hurt your credit score. Instead, paying your account in full (or paying as much as you can) will reduce your interest costs and help keep your account in good standing. It also demonstrates positive credit habits on your report.
- Consolidate debts. If you already have one or multiple credit cards, you can transfer them to a balance transfer credit card that charges no interest for up to 26 months. Not only will you save without paying any interest, you can also potentially pay off your debts faster and potentially lower your combined credit limits.
- Manage your credit limit. If you're planning to apply for another credit card and already have a card with a high credit limit, you may want to consider lowering it. Multiple unsecured debts and high credit limits can hurt your credit score. You can see our guide to how credit limits affect credit scores for more information.
What type of credit card will help my credit history?
If you're trying to build your credit history, there are a few different credit cards that may help you:
- Low interest rates. You should always aim to pay your balance in full to avoid paying interest. If you think there may be instances when you can't clear the balance, consider a card that charges a low interest rate. Compared to other cards, interest rates between 8.99% p.a. and 14.99% p.a. are considered low.
- Student or first credit cards. There are some products designed to suit people with limited credit card experience. For example, the ANZ First is a no frills card that is suited for first-time credit card applicants or people who want a basic credit card.
- Low credit limit. A credit card with a low maximum credit limit can help keep your spending in check.
Most Australian credit card issuers won't approve applicants who have a bad credit history. This is why it's important to order a copy of your credit report and score (which you can do for free through Finder) before you apply. If you have a low credit score, you should spend some time improving it before you apply. Check out our guide to improving your credit score for some tips.
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What is a good or bad credit score?
If you're wondering where your credit score sits on the scale and want a goal to work towards, you can look at the credit score bands issued by credit reporting agencies Experian and Equifax below.
| Credit band | Experian | Equifax |
|---|---|---|
| Excellent | 800-1,000 | 833-1,200 |
| Very good | 700-799 | 726-832 |
| Good | 625-699 | 622-725 |
| Fair / Average | 550-624 | 510-621 |
| Weak / Below average | 0-549 | 0-509 |
If used responsibly, credit cards can be a useful tool to manage your finances and build a healthy credit history. It's important to spend properly, make timely repayments and pay off as much as your balance as possible each month. If you have a low credit score with negative listings on your report, spend some time improving your score before you apply for a credit card.
Other guides to help improve your credit history
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Ask an Expert
I am surprised that I have a credit rating of about 730 when I OWN my own home plus a rental, have 2 credit cards that are paid in full each month and have NEVER been in arrears and have no other loans. All my utility bills and any other bills are paid on time, once again never in arrears. Plus I have a substantial bank balance. I would have thought I would have had the top rating, so why not?
Hi Marian,
Thanks for your question.
There are several possibilities why your credit score is low despite having a good credit track record. One is that there may be listings in your file that are erroneous and need to be removed. You can confirm this by checking your credit report. You may request a free copy of your credit file.
If you see any erroneous entry in your file, kindly contact the credit scoring bureau and request to have that error corrected. Check out our guide on how to fix mistakes on credit file for your reference.
I hope this helps.
Cheers,
Anndy