What to know about bad credit

A bad credit history can have serious consequences for your financial future, so here’s what you need to know about improving your credit rating.

A bad credit rating is bad news for your ability to access a home loan, personal loan or any other form of credit in the future. If you’ve defaulted on loan repayments, entered into a debt agreement or even applied for a credit card, all this information goes into your credit file and can severely impact your finances for years to come.

So what is bad credit, what negative information is included in your credit file and how can you improve your credit rating? Read on to find out.

How can bad credit affect me?

When you apply for any type of credit in the future, such as a home loan, the lender will examine your credit file and credit score to determine the risk involved in lending you money. The lender needs to be reasonably certain that you will be able to repay the money you borrow in a timely fashion and that there is minimal risk of suffering a loss when you default on your loan.

So if you’ve got a bad credit score or black marks on your credit file, this will immediately raise red flags for the lender. Borrowers with a history of missing repayments, defaulting on debts or bankruptcy are seen as being high-risk customers – if you’ve struggled to keep up with repayments or defaulted on a loan in the past, what’s to stop the same thing from happening again?

As a result, if you have bad credit there’s a much higher chance of your loan and credit applications being rejected and you may find it difficult to access the financing you need. You may need to examine your bad-credit financing options in order to get access to funds.

Unfortunately, one of the consequences of bad credit is that you may be tempted to accept financing with higher-interest rates and fees, or you may be targeted by loan sharks and other unscrupulous lenders. This could prompt you to take out a loan you can’t afford and eventually lead you even deeper into debt.

What listings on my credit file are bad?

There are several listings that can have a negative impact on your credit file, including:

• Bankruptcy. Bankruptcy is when you are legally declared unable to repay your debts. Once you are declared bankrupt you will remain classified as bankrupt for three years, and the listing can remain on your credit file for five years or longer.
• Debt agreements. A debt agreement is a binding agreement between you and your creditors. If you enter into such an agreement, your creditors agree to accept an amount of money from you, paid over a set period of time, to settle your debts.
• Defaults. If you fail to make a payment on a debt within 60 days of the due date, your credit provider can hand the matter over to debt collectors and also report the debt to a credit reporting agency. The default will then be listed in your credit file and affect your credit score.
• Writs, summons and court judgements. If you’ve been invited to appear in court to settle a debt, this (along with any resulting court judgement) will be listed in your credit file.
• Late and missed payments. Your credit file records both positive and negative information about your repayment history, so if you’ve made late credit card or loan repayments or missed them altogether, it shows that you may have trouble managing your finances.
• Multiple credit enquiries. If you make several credit enquiries in a short space of time, for example if you file multiple personal loan applications in the space of a couple of months, it indicates to lenders that you may be under financial stress. This can in turn affect your credit rating.

I have bad credit – can I still get a loan?

Bad credit can certainly have a detrimental effect on your ability to access credit in the future, but it doesn’t mean all options are closed to you. Even if your credit history is far from perfect you may still be able to access:

• Personal loans. It’s still possible to qualify for a personal loan if you have bad credit; in fact, some lenders specialise in offering financing to borrowers with a less-than-perfect credit history. You can compare loans of up to $5,000 and even $10,000 at finder.com.au, or you may need to consider a short-term loan if you need urgent access to cash. Just make sure to only borrow from a reputable registered credit provider and remember that because you have bad credit, the lender may charge you a higher interest rate on the money you borrow.
• Credit cards. It’s quite difficult to qualify for a credit card in Australia if you have bad credit, so your only option may be to use a debit card instead. Debit cards allow the same convenience as credit cards but with the key difference that you spend your own money rather than funds from a credit provider. You can also access prepaid debit cards with some short term loans.
• Home loans. A bad credit rating won’t necessarily stop you from getting a home or investment loan. There are several non-conforming Australian lenders that offer home loans for bad credit borrowers, so start comparing your loan options today. You can also speak to a mortgage broker for specialist home loan advice tailored to your financial situation.

How long will I have bad credit?

The time that negative information stays on your credit file varies depending on the type of listing:

• Bankruptcy. Bankruptcy is listed on your credit report for two years from the date your bankruptcy finishes, or five years from the date you were declared bankrupt. In some cases, it can stay on your file for even longer. Your name and details will also be included forever on a publicly accessible database known as the National Personal Insolvency Index (NPII).
• Debt agreements. Debt agreements are listed on your credit file for five years, or potentially longer in some circumstances. Your name and details will also be entered in the NPII for five years from the date of the agreement or two years after it ends, whichever occurs later.
• Defaults. Credit defaults are listed on your report for five years, or seven years in the case of a clearout (this is when your creditor can’t contact you).
• Writs, summons and court judgements. This information remains on your credit file for five years.
• Late and missed payments. Late and missed payments on loans and credit cards are recorded on your credit file for two years.
• Multiple credit enquiries. Applications for credit, including loans, credit cards and more, are listed on your credit file for five years. These listings are included regardless of whether or not your application was approved.

You don’t need to contact the credit reporting agency to have these listings removed from your file after the specified time period; they will be automatically removed by the agency.

What can I do to improve my credit?

If you’ve got bad credit, there’s plenty you can do to repair your credit history and improve your chances of getting approved for a loan. Some of the steps you can take include:

• Get a copy of your credit file. Order a copy of your credit report to get a full rundown of the bad credit listings that are hurting your borrowing power. It’s free to get a copy of your credit file once every 12 months or if you have been denied credit in the past 90 days.
• Fix any incorrect listings. While you may not be able to do anything about some of the bad credit listings in your file, it’s important to rectify any mistakes in your report. For example, you may have been a victim of fraud and may therefore not be responsible for one or more of the debts listed. Contact the credit reporting agency to report any errors, and be willing to take the matter up with the credit provider if needed.
• Take control of your debt. From debt consolidation loans to balance transfer credit cards, look at the options available to help you get out of debt. However, remember that some methods of dealing with debt, such as entering into a debt agreement, can have a severe impact on your credit file, so work out a budget and cut back on expenses wherever possible so you can bring your debt under control.
• Stay on top of repayments. Under Australia’s comprehensive credit reporting system, your credit file contains positive and negative information about your credit history. A track record of making timely repayments towards your debt can help improve your credit score and demonstrate your improved financial discipline.
• Avoid making multiple credit applications. Don’t make multiple credit applications in a short period of time, as this will lower your credit score and indicates to lenders that you are under financial stress.
• Get expert advice. Contact the National Debt Helpline on 1800 007 007 to find free financial counselling in your area. Financial counsellors offer independent expert advice on how you can manage your money and eliminate debt.

The top questions we've been asked about bad credit

How can I get a copy of my credit report?

You can order a copy of your credit file from one of Australia’s three main credit reporting agencies: Equifax, Dun & Bradstreet or Experian. You can also get your free credit score (Equifax Score) from finder.com.au.

My credit card application was refused – will this affect my credit history?

Yes, all applications for credit are included in your credit file.

What are the names of Australia’s credit reporting agencies?

Australia’s three main reporting agencies are Equifax, Experian Australia and Dun & Bradstreet. In Tasmania, credit information is collected by the Tasmanian Collection Service.

How can I track my credit score?

Some of Australia’s credit reporting agencies operate credit-file monitoring services to help you keep track of your credit score. You also receive a free credit score every six months when you get your free credit score from finder.com.au.

Will I have a credit file if I’ve never applied for a loan or credit card?

You may still have a credit file if you’ve applied for any other type of credit or borrowed money in some other way. For example, a mobile phone contract held in your name or interest-free store financing can both be reported in your credit file. If you don't have a credit file you can find out how to build a credit history in this guide.

Can I still get a home loan if I have bad credit?

Yes, but you may need to borrow from a non-conforming lender that specialises in loans for bad-credit borrowers.

Picture: Shutterstock