For most people, large purchases like a home or vehicle are simply impossible without credit. It’s at this point, when they’re in need of a loan, that many first hear the word ‘credit score’. Some think to themselves “I have no credit history and therefore no marks against me. My home loan application should go off without any trouble.” But that’s where they’re wrong. Having no credit score is actually worse than having an average or even slightly below average credit score.

Without a credit score, lenders have no way of determining what kind of risk you pose as a borrower. And, to a lender, an unknown risk is even worse than a moderately high risk. This uncertainty avoidance makes it very difficult for people with no credit score to obtain credit. The bottom line is that if you want to qualify for a large loan, you need to have a credit score.

How, then, do you go about establishing a credit score – one that will help you qualify for low-interest loans? In this article, we give a step-by-step answer to that question.

Step 1: Take out a credit card or small personal loan

To establish a credit score you first have to take out credit. This could be a store account or a credit card. If you decide to take out a credit card, remember to set a reasonable limit and stick to it.

Step 2: Prove that you are a responsible borrower

Once you’ve taken out credit, credit bureaus will start to keep a record of your financial behaviour. All you have to do is make your repayments on time and in full and keep your credit card expenses well under the limit you’ve set yourself. To avoid the risk of late payments, consider setting a debit order, if this was not already done by the credit provider ensuring consistent payments and a spotless credit history.

Step 3: Check your credit score

Once a bureau has created a report on you, you can get it sent to you (one free report per year). It’s also possible to get a free credit report from Old Mutual Finance. With the easy-to-use CreditView tool (powered by TransUnion), you’ll be able to view your credit score, make suggested changes see the impact on your score, and view historical data of up to 12 months. Once in possession of your report, check that all records are accurate (bank statements would be useful) and that you haven’t fallen behind on any accounts.

If you are now considering taking out a personal loan to establish your credit score, see our article on how to choose a personal loan.

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