Bad credit: What is it and how can you fix it?

A bad credit rating can reduce your chances of approval when applying for a home loan, personal loan or credit card. 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 impact your finances for years to come.

So what is considered bad credit and how long does this information stay on your credit file? You can use this guide to find out, plus pick up tips to improve your credit rating.

How can bad credit affect me?

When you apply for any type of credit, the lender will examine your credit file and credit score to determine the risk involved in lending you money. The lender does this to ensure you can repay the money you borrow in a timely fashion and that there is minimal risk of suffering a loss if you default on a loan.

So if you have a bad credit score or black marks on your credit file, this will raise red flags for the lender. As a result, there’s a much higher chance of your loan and credit applications being rejected if you have a low credit score. Another consequence 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 sink even deeper into debt.

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What listings on my credit file are bad?

The listings that can have a negative impact on your credit rating include:

• Bankruptcy. Bankruptcy is when you are legally declared unable to repay your debts. Bankruptcy lasts 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 a debt 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 involve debt collectors and 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. Any missed or late payments will be recorded on your file and reflects badly on your ability to manage a line of credit.
• Multiple credit enquiries. If you make several credit enquiries in a short space of time (if you apply for several credit cards at once) it indicates to lenders that you may be under financial stress and can negatively impact your credit rating.

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

Bad credit can reduce your ability to access credit in the future, but it doesn’t mean all options are closed to you. Even if your credit history isn't 'excellent', you can learn your likelihood of approval with the following credit products below:

• Personal loans. It’s still possible to qualify for a personal loan if you have bad credit. Some Australian lenders specialise in offering financing to borrowers with a less-than-perfect credit history. You can compare bad credit loans of up to $5,000 and even $10,000 at finder.com.au. You may need to consider a short term loan (also known as a pay day loan) if you need instant approval and 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. If you're determined to get a credit card, you'll need to spend some time improving your credit rating before you apply.
• Home loans. A bad credit rating won’t necessarily stop you from getting a home loan 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.

If you're unsure whether you're eligible for a line of credit, contact the financial institution to check first. This is because any rejected credit applications will only further hurt your credit rating.

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.

The credit reporting agency automatically removes these listings after the relevant time period.

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 report. You can get your credit report and credit score for free with finder. Then you can get a clearer understanding of your finances, including your credit score and any credit listings that are hurting your rating. It’s good to check your credit report regularly for both incorrect listings and areas you can improve.
• 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 not be responsible for one or more of the debts listed. Contact the credit reporting agency to report any errors and 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. Some methods of dealing with debt, such as entering into a debt agreement, can also impact on your credit file. Before you make a decision, 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.

You can use finder's guide to credit repair to pick up more tips.

The top questions we've been asked about bad credit

• How can I get a copy of my credit report?

  You can get your free credit report and score from finder. You can also contact the bureau directly to get a free copy of your report within 10 days.

• 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 illion (formerly Dun & Bradstreet).

• 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. If you request a free credit score from finder, we'll also notify you anytime something changes on your credit file so you can stay on top of your finances.

• 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.

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