Can your credit card help boost your credit rating?
If you have a bad credit rating, chances are you know the effect it's having on your current and future financial situations. A bad credit rating can make it harder to obtain loans or even apply for a mortgage. However, there are ways you can improve your credit rating.
What is "bad credit"?
In Australia, there are various credit reporting agencies and each has its own way of calculating credit scores.
|Fair / Average||550-624||510-621|
|Weak / Below average||0-549||0-509|
How do I know if I have bad credit?
The first thing to do is to check your credit report and credit score, which you can do for free with finder.com.au. Once you get your credit report (delivered through Experian if you request it through finder.com.au), you will be able to see all of the listings on your file. These will include the credit you have applied for in the past five years, your repayment history for the past two years and whether you have defaulted on those accounts. If you've ever been bankrupt or applied for credit but not been approved, this will be listed as well.
Here are the listings to look out for; these can put you in the "bad credit" bucket:
- Bankruptcy. If you declare bankruptcy this will definitely have a negative impact on your credit rating. Bankruptcies are listed on your credit report for about three years, but during that time you can engage in good credit behaviour to make sure your credit report is in good condition when the listing is removed.
- Defaults. If you are overdue on a credit account by more than 60 days and you owe more than $150, a default listing can be added to your credit report. If you pay the account the listing will be updated to "paid" but it will remain on your report for five years. This will affect your credit score negatively.
- Multiple credit enquiries. Making an enquiry for credit is not a bad thing, but making multiple enquiries for credit in a short space of time indicates to a lender that you're in desperate need of a loan. It will affect your credit score negatively and should be avoided. As a general rule, only make one credit application every three to six months.
- Late payments. Two years of your repayments history is now included on your credit report and can affect your credit rating. One late payment will not necessarily give you bad credit but multiple late payments can, so be sure to make your payments on time.
- Serious credit infringements. Defaults and serious credit infringements are closely related, but the difference is that with a default you are in contact with a lender. Serious credit infringements occur when the lender cannot contact you at all about a default. These listings remain on your credit report for seven years rather than five.
Can I repair my credit rating with credit cards?
The short answer is yes, but the long answer is only if you already have credit cards. This is because getting approved for credit cards when you have bad credit is close to impossible, so you can only do this if you had a credit card/s before you run into bad credit. If this applies to you, here's what to do:
- Make repayments on time. Your repayment history is included in your credit report, so make your credit card repayments a priority. Once your bad credit listings come off your credit report, you'll want plenty of good credit listings, such as on-time repayments, to boost your credit score and help you get approved for whatever you need.
- Consider lowering your limit. If your credit limit/s are excessive and you are not using them, consider lowering them. The total of your credit limits affects your credit score and lowering them can improve your score.
- If you have multiple cards, consider consolidating them. Having multiple lines of unsecured credit can have a negative impact on your credit score, so consolidating your cards can have a positive impact on your score. To do this, focus on repaying down the balance of one card to close it and just leave your other card/s open.