Most people are concerned about their credit rating because having a good score can boost your chances of being approved for mortgages, credit cards and bank loans. It can also make utilities and insurance premiums cheaper because you're seen as a safe bet who'll almost certainly honour that direct debit each month.
For some of us, though, the mere mention of credit scores results in a cold sweat. People with poor or bad credit histories know that their file is littered with payment defaults, late payments and lingering overdrafts; for some, it's worse, with court judgements and even bankruptcies.
It's easy to feel hopeless if you worry that a poor credit history is something that you can't recover from. Bankruptcies can remain on your file for seven years or more, and lots of other so-called black marks, like late payments can linger for at least two years. While you have poor credit, you might believe that you won't get the chance to prove yourself because no lender will trust you.
What's considered to be a bad credit score?
A score lower than 549 is considered to be weak or poor if you consult Experian. Each of Australia's credit reporting agencies has its own banding, but they're broadly similar, with Equifax deeming scores under 509 to be poor.
How a bad credit score affects you
When you submit an application to a lender for credit, they looks at your file and decide how much of a risk it is to lend you money. Your credit rating is essentially a measure of risk. Your lender needs to know that you're likely to pay back the money and interest without delay, default or expensive intervention. If you have bad credit car finance may be more problematic for you, although there are companies that specialise in helping people in your situation.
However, you'll probably find that you're more likely to be rejected by lenders if you have bad credit. You may be able to get personal loans for bad credit, but you'll probably pay higher interest rates.
Another negative consequence is the temptation to approach more unscrupulous lenders, easy online payday loan providers or even loan sharks, which you should really try to avoid.
You need to concentrate on repairing your poor credit history
Thankfully, there's things you can do to repair your rating that don't involve applying for and managing more credit. Taking these steps will improve your credit score and also teach you better habits so that when the time comes, you'll find it easier to get credit and pay it back successfully.
Request your credit report
You can get one annual report for free, as well as more frequent copies for a small fee. You'll be able to see where you're going wrong so that you can concentrate on these areas. Reviewing and checking your report frequently also shows that you're financially responsible.
Sort out any errors on your report
You can't change or delete any listings that are factually correct only time will do that. However, you can ask the credit agencies to delete or amend any notes or listings that are wrong, fraudulent or that are still lingering long after they should have been wiped. You could recoup a few points by doing this every little bit helps!
Get a handle on your debt
You could apply for a debt consolidation loan, or transfer your credit card balance to a zero interest credit card. Just removing the interest from your card repayments for a few months means you can pay more off the principal amount.
The best thing you can do is to budget carefully and use your savings to pay down debt. You can use the free InfoChoice budget planner calculator to help you balance income and spending.
Keep up with repayments
Australia introduced a new credit reporting system in 2018 which lists the good as well as the bad, so accentuate the positive. If you always pay your mobile bill on time, then that'll help you to repair your credit. The same goes for your debt payments, especially if you're paying down problematic debts. You need to show that you mean business.
Avoid making several credit applications
Any application for credit stays on your file for five years, whether it's rejected or accepted. If it's rejected then it's bad news and making several applications within a few months tells lenders that you're struggling financially.
Do ask for help and advice
You really don't need to struggle on alone with poor credit or debts. You can call the National Debt Helpline on 1800 007 007 to find a free, government funded financial counsellor near you.
You can still get loans with bad credit
Bad credit will reduce your ability to get more credit, but it doesn't mean it's impossible. There are providers out there that will help people with poor credit histories, as many people are serious about improving their rating.
You just have to look carefully through a comparison site to find the right providers, as well as learn how to use a credit card repayment calculator.
You can still get personal loans with a poor credit history as some Australian lenders specialise in bad credit personal loans. Always remember, though, that you'll either have to pay a higher interest rate or a higher set-up fee (or both). Still, if it helps you to climb up the ratings, it's a worthy sacrifice.
You may find it difficult to qualify for a credit card with a bad history, so it might be an idea to work on repairing your credit before you apply (remember, each failed application leaves a mark on your file). There are providers in Australia, but make sure you get advice and consider each option carefully before making a decision.
If you're looking for a home loan with a bad credit rating then you'll be able to find several lenders that specialise in this area. Head to a comparison site to look for the non-conforming lenders who could help you. It may also be a good idea to speak to a broker for targeted mortgage advice.
If you're unsure about your chances of success with an application, call the provider to get a better idea. If you're likely to be rejected, then don't proceed with that lender or product application.