How do people with bad credit get good credit?
A significant proportion of Aussies don’t want to know what their credit rating is because they know it’ll be indifferent at best, with some fearing the worst.
When you make an application for any type of credit, whether it’s a small overdraft or a home loan, lenders use your credit report to see how much of a risk it is to lend the money to you. They look at how you’ve managed previous credit agreements, overdrafts and even utility bills, because this information is listed on your report.
What makes a good score?
There are three main credit reporting bureaus in Australia and you can contact any or all of them to get your credit report: Equifax (previously Veda), illion(previously Dunn & Bradstreet) and Experian.
They each have a slightly different scoring system. Experian, for example, uses a scoring chart between zero and 1,000 (with scores of 800 and being “excellent”), whereas Equifax uses a scale that goes up to 1,200, with anything over 833 being “excellent”.
If you know your score is low, then you need to do something about it. A poor credit history doesn’t just mean that you get turned down for a new credit card; it can also make your mobile phone contract and even your insurance premiums more expensive. If you have bad credit, home loans can be harder (but not impossible) to find, too, so it’s imperative that you improve matters.
Order your credit report and find out your score
You can get one free credit report each year, so even if you’re dreading the thought of looking at it, just go ahead and order it. You can’t take any steps to improve your financial standing if you don’t know exactly what you’re dealing with. You may think that always being late with your phone bill doesn’t matter, for example. Think again, because it does. This is something you can easily improve on.
Take a deep breath and look at the black marks
These negative listings include lots of loans or credit cards in a short space of time, using up a high proportion of your available credit and frequently using an overdraft.
There are also more serious listings like late payments, defaults and bankruptcies, which can linger on your report for at least five years.
Sometimes a listing is incorrect or is very outdated, so you can ask for it to be removed.
Get any incorrect or outdated listings removed
If you do find listings that shouldn’t be there anymore, or, indeed, there in the first place, then you should contact either the creditor (lender) or the credit reporting bureau that you ordered your report from. However, you can only remove incorrect or “spent” listings; you can’t remove anything that’s factually correct.
Look for things you can work on
It can be a sobering experience, looking through your credit report, especially if you’re recovering from problems. However, there’s always something you can do to dig yourself out of the hole. That phone bill, for a start; make every effort to pay it on time each month from now on. The same goes for all your other bills.
If you have a number of personal loans or credit card accounts, then it might be an idea to consolidate them onto one of the many no-interest credit cards on the market. These cards offer introductory periods of no or low interest and this can give you anything up to 15 months or so to really work on reducing the principal balance. Make sure you know down to the last cent how much any new credit agreements will cost; use a car loan interest calculator, for example, before you even apply.
Avoid defaults at all costs
If there are any overdue amounts that are more than $150 on any of your accounts then clear them as soon as possible. If they’re more than 60 days late they’ll be deemed a default and this will stay on your report for five years. Even if you can only pay half the amount now, do so and then talk to your creditor or service provider to work out another repayment plan.
Monitor your credit from now on
It’s a good idea to order at least one credit report a year to check on your progress. It also sends a message to the reporting bureaus and lenders that you mean business. Asking for your file doesn’t have a negative impact at all, in fact, it shows you’re trying to improve your situation.
How are credit scores calculated?
Your whole score is calculated from the information on your report. You can really get to work on improving your rating if you know how much weight each type of information and account has. Your report will feature:
Your personal information
This means your age, your employment status and how long you’ve been at your current address. These are all used to determine the risk the lender’s taking.
The age of your report
The length of time you’ve been active with credit makes a difference too; if you have a long history of good management, then your score will be high.
The type of providers you use
The type of credit provider makes a difference to your score. If you’ve had a bank account and you’ve handled it well, it will help, but a credit card will carry more weight in the eyes of lenders (for good or bad).
Your credit limits and the type of credit
A lot of your score comes down to how well you handle the “riskier” types of credit—credit cards, for example. The amounts of credit that you apply for also count towards your risk and therefore your final score.
The number and frequency of applications
The number of inquiries you make counts, too, as each application for credit cards, loans and utilities is listed. If you make a lot of applications, you’ll be lowering your score.
Your defaults and late payments
If you have unpaid debts, judgements, court writs or special arrangements then your score will drop significantly because you’ll be deemed to be riskier than average.
Even if you have some negative listings, looking at your credit report is that vital first step to recovery. If it’s really bad then you need to build your score back up before you look at products like credit cards for bad credit or personal loans for bad credit.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.