A bad credit rating can have a huge impact on your finances, but there are ways you can improve your credit reputation.
A bad credit rating can cause a lot of problems for borrowers. Whether you are applying for a personal loan, a car loan or a new credit card, banks will hit you with high interest rates or reject your application outright if you’ve got a bad credit history. This can be a very stressful situation because you can end up in a vicious cycle of debt.
Banks and even utility companies can quickly check your credit history to determine your creditworthiness. Some employers have even started doing credit checks on prospective employees as well. The importance of having good credit can’t be stressed enough.
For people who already have bad credit, the going might be tough but all is not lost. Let’s take a deeper look at what is in your credit file and what you can do to improve it.
Your credit file
Your credit history contains pertinent information regarding your finances. It will specifically include the following:
- Personal details. This includes your name, residential address, date of birth, driver’s licence details and gender.
- Previous credit applications. Any credit inquiries or loan applications you’ve made in the last five years are recorded.
- Credit accounts and enquiries. All current financial accounts under your name and any formal enquiries you’ve made for credit are recorded.
- Credit defaults. Late or unpaid bills are listed on the credit report. A default will be recorded on your file if the lender has taken action to retrieve the outstanding amount.
Defaults and credit enquiries last on your account for five years. Court writs and summons are kept on your file for four years.
The following marks are kept on your file for seven years.
- Clearouts. A clearout refers to a creditor trying to receive owed money but not being able to locate the person who owes the money, despite attempts to contact them.
- Bankruptcy. If you ever filed for bankruptcy, all details will be recorded here.
As you can see, taking steps to improve your credit rating can make borrowing a lot easier for you in the future.
How can bad credit affect your finances?
Bad credit will affect your ability to borrow from banks, mortgage companies, credit card providers and other financial institutions. Below are just some of the few ways that bad credit can affect your life:
A bad credit rating adversely affects your ability to get a home loan application approved. If your credit record is slightly negative, the result could be higher interest rates even if the application does get approved. However, if you have a sketchy history of being able to make regular payments, it’s possible that your application will be declined.
Bad Credit Home Loan Comparison
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There are credit cards that are specifically created for people with bad credit. However, don’t expect these to have the same benefits as regular credit card holders. These credit cards tend to come with restrictions and high interest rates. The purpose of having a “bad credit rating” credit card is to build up enough good credit history to recover from earlier financial mistakes. It works by showing creditors that you are now able to handle debt obligations by paying them off in time.
If your applications for other forms of credit are declined, getting a payday loan might be one option to get credit in the short term. This type of loan should generally be avoided if you have other ways to secure credit because it has higher interest rates and fees.
Payday Loan Comparison
Warning about Borrowing
It can be expensive to borrow small amounts of money and borrowing may not solve your money problems.
Check your options before you borrow:
- For information about other options for managing bills and debts, ring 1800 007 007 from anywhere in Australia to talk to a free and independent financial counsellor
- Talk to your electricity, gas, phone or water provider to see if you can work out a payment plan
- If you are on government benefits, ask if you can receive an advance from Centrelink: Phone: 13 17 94
The Government's MoneySmart website shows you how small amount loans work and suggests other options that may help you.
* This statement is an Australian Government requirement under the National Consumer Credit Protection Act 2009.
How to avoid bad credit
Having a bad credit rating isn’t the end of the world. There are ways for you to recover by re-establishing a good pattern of repayments going forward. Here are some ways you can fix a bad credit rating:
- Pay off your debts. Start paying off your debts to demonstrate your sincerity as a borrower. If you cannot repay the debts quickly, it may be a good idea to move debts from high-interest accounts to low-interest accounts.
- Use a credit advocacy service. Companies like Princeville can investigate bad credit marks to ensure they were lawfully recorded on your file. If they aren’t they can be removed from your file. While these services aren’t cheap, they can be a useful way to remove bad credits if they’ll stop you from being approved for a home loan.
- Pay on time. Whether it’s the water bill or the credit card bill, be sure to pay off the outstanding amount before the due date. This will be increasingly important once the new credit reporting changes come into effect on 12 March 2014. From this date your file will also hold 24 months of repayment history about your account for accounts with licensed credit providers, as well as your credit limit.
- Avoid applying for unnecessary loans. Remember that all rejected applications are recorded on your file so having a credit application declined can adversely affect your ability to borrow in the future.
- Regularly check your credit file. It is highly recommended that you ask for a copy of your credit report before you seek credit to know exactly what lenders can see in your file. It is possible that the record contains inaccuracies that are affecting your ability to borrow.
As you can see, bad credit can have a significant adverse effect on your life. If you have a bad credit rating it’s important to take steps to improve it right away. Follow the guidelines outlined above to get your financial future back on track.