Bad credit history: what it is and how to deal with it

A bad credit history is bad news because it can lower your chances of securing a personal loan, credit card and even a home loan. Most things that you do financially are listed on your credit file, good and bad, but it’s the bad listings that have the most impact. What’s worse is that these black marks can linger for several years.

What does bad credit actually mean?

Your credit report has information about your financial history and the credit bureaus, such as Equifax and Experian, use the data to assess how risky you are for lenders to extend credit to you. This risk is expressed as a credit score. If you have missed or late repayments, defaults, lingering overdrafts and even bankruptcies, then your score will be lowered.

What is a good credit score? And what is a bad credit score?

If your credit score is between 0 and 459, it’s considered to be weak.

Excellent credit scores are anything over 800 (out of 1,000) for Experian and 833 (out of 1,200) for Equifax.

The practical effects of a poor score

When you apply for credit, lenders look at your score to see how much risk is involved. The risk is the likelihood of you being unable to meet your payments and the lender having to spend time and money chasing you. If you’re likely to repay on time, you’re a low risk. If you have a history of late payments, you’re a higher risk.

Several blots on your credit file will make a lender think twice, so you’re more likely to be rejected. This doesn’t mean there aren’t home loans for people with bad credit, but the terms may be less favourable. In the worst–case scenario, you can’t get finance from mainstream lenders and you have to approach rather more unscrupulous providers with higher interest rates than you can handle.

So, what are the bad listings and how long do they last? 

Bankruptcy

If you become bankrupt, you’re legally deemed to be unable to pay your debts. Bankruptcy lasts for three years and the listing remains on your file for five years after its discharged.

Part IX debt agreements

You enter into debt agreements if you’re having difficulty keeping up with your repayments so that they’re more manageable. It’s a binding agreement between you and your creditors, it is expensive, restrictive and stays on your file for five years.

Defaults

If you’re more than 60 days late with a payment of $150 or more then your creditor can report this to the credit reporting agencies and also engage debt collectors to deal with the situation. A default can stay on your file for five years.

Legal action

Legal action could be a writ, a court judgement or a summons and if you’ve had any of these, they’ll be listed.

Late or missed payments

If you have one or two late payments over the years, then you won’t be too badly affected, but a series of them will chip away at your rating because they’ll demonstrate that you don’t handle credit well.

Several closely–spaced applications

Making more than one or two applications for credit in a short space of time can indicate that you’re under financial stress, which has a negative effect on your credit rating. Even if you’re approved for one or more applications, you’ll still suffer a dip.

Getting loans and credit with a bad rating

While poor credit can reduce your ability to access loans, overdrafts and credit cards, there are options out there. In fact, finding and managing a small amount of credit is a way to repair your rating.

Getting a personal loan

You can get personal loans for bad credit from lenders who specialise in offering credit to people who are in the process of rehabilitating their credit rating. You’ll need to visit a comparison site to find the right one, as well as to make sure the lender is reputable.

Some lenders will refuse to lend to borrowers with a bad credit history, while a growing number of smaller lenders will charge you a higher interest rate to cover the risk of lending to a borrower with a bad credit history.

For example, peer to peer lender RateSetter charges headline rates between 5.56 per cent  and 20.42 per cent depending on the credit rating of the borrower.

Credit cards

It’s tricky to qualify for a credit card in Australia if you have poor credit, so you may just have to use a debit card instead for a while. You’ll have to work on your credit rating before applying for a credit card.

Home loans

Having bad credit may not stop you from getting a mortgage as there are quite a few specialist lenders in Australia who offer home loans to people with poor credit or with low documentation.

Always check your eligibility before you apply

If you’re not sure you’ll be accepted for a particular line of credit then don’t apply before speaking to the lender, as rejected applications really can damage your file.

How can I improve my credit rating?

Thankfully there’s lots you can do to bring up your credit rating so that you’re able to get access to funds. Having a good credit rating isn’t just about loans, it can also make utilities like phone bills and insurance cheaper, so it’s really worth the effort.

Get your credit report

Obtaining your credit report means that you have a clearer picture of where you’re going wrong. You could also find incorrect or outdated listings that are bringing your score down and get them removed. You should check your report once a year, ideally. Ordering your file doesn’t harm it at all, in fact, it shows you’re serious about your finances.

Although there are many credit score apps and sites, there are just three credit report agencies that will give you your full credit report. They are Equifax (formerly Veda), illion (formerly Dunn & Bradstreet) and Experian.

Remove incorrect listings

Some listings may be overdue for removal, or they may actually be plain wrong; either way, you should contact the CRA you ordered your report from and ask them to be removed.

Take control and show it

If you explore the options for taking charge of your debts and then implement some of them, it sends a message to lenders that you’re working on it. You might consider a debt consolidation loan or one of the zero interest credit cards on the market so that you can reduce your principal balances. You also need to create and stick to a sensible budget so you can pay more of your debts down.

You can compare personal loans for debt consolidation purposes or balance transfer credit cards at InfoChoice.

Maintain your payment schedule

Australia has a comprehensive credit reporting system, so positive information—paying bills on time, keeping up with debt repayments and so on—helps to raise your score.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.