Personal Finance

Bad credit: What is it and how to fix it?

There are various ways that a person can get bad credit which is reflected as a low credit score making it difficult for them to get any type of loan or even a credit card. The impact of that information on a credit file may take years to clear but there are ways that a credit rating can be improved.

What exactly is bad credit? 

Credit reports are used by various credit bureaus to calculate the risk of a particular borrower. Bad credit is reflected on these with a score that is accumulated from various credit issues and can include missed repayments, loan defaults, bankruptcy, and debt agreements. Credit scores of up to approximately 550 are considered to be weak and below average. Generally, from 550 to about 620 is an average or fair risk to the lender. Depending on the credit bureaus used, an excellent credit score will range from between 800 to 1200.

How does bad credit affect the consumer? 

Lenders want to be sure that they will suffer minimal risk when issuing a loan to borrowers. As soon as anyone applies for any type of credit, the lender will scrutinize the individual’s credit file to ensure that their credit score is satisfactory and that the risk of a default for the line of credit is minimal. 

If the lender sees a bad credit score, the chances of the borrower getting a credit application approved are instantly reduced. Applicants with very low credit scores are instantly rejected, and those with slightly higher ones are usually offered credit with higher financing rates. 

Consequently, people with bad credit that desperately need to borrow money may be forced to go to private lenders or loan sharks where they will be paying exorbitant fees and interest rates. Besides taking a risk with these lenders who are often unscrupulous, it is highly likely that with their terms and higher interest rates they will sink deeper into debt. 

Which listings can have a negative impact on a credit file? 

Defaults

Any payments that have not been made on a debt within 60 days can prompt credit providers to employ the services of debt collectors and to also report the debt to a credit bureau, these are then added it to their credit file. 

Bankruptcy

People who are unable to pay their debts may file for bankruptcy. This means that they are legally declared unable to pay their debts and are released from any responsibility to settle them. Most bankruptcies last for 3 years but will stay on the person’s credit file for 5 year and lower their credit score. 

Debt agreements

Debt agreements with creditors are binding and have to be adhered to. The amount of money agreed on has to be paid over the set period of time until the debt is settled and non-payments will be registered on their credit file. 

Summons and court judgments

Any writ or summons to appear in court for debt settlement and the resulting judgment will be reflected in the credit file of the person involved. 

Late payments

Any late payments or those that are missed are recorded and show that the individual is not capable of managing his credit responsibilities. 

Unusually high amount of credit enquiries 

Credit ratings are also negatively affected when several credit enquiries are made within a small amount of time implicating financial difficulties. These can also include the application for several credit cards at once.

Do people with bad credit qualify for a loan? 

Even people with a less than excellent credit history can qualify for some types of credit products, but it all depends on how bad their credit history is. If a person has a lower credit score it is best to first make enquiries about the possibilities of qualifying because any rejected credit applications will reflect negatively on their credit rating. These are some of the credit products that they may qualify for: 

Home Loans

There are Australian lenders who are less rigid and will offer a home or investment loan to people with a lower credit rating. Banks often have loans that are specially tailored to various financial situations and mortgage brokers are qualified to advise on these. 

Credit Cards

Credit cards are difficult to get with a bad credit rating in Australia and the best option may be a debit card. These allow the person the convenience of making card payments but with the funds that they already have in their banking account. 

Personal Loans 

For people that do not have the perfect credit history, there are some Australian lenders who offer financing. These are for smaller amounts and are called bad credit loans. There are also short term loans, also known as pay day loans, available for those that need cash urgently. Unfortunately, these types of loans have higher interest rates because of the lender’s history. These loans should best be acquired from registered cash providers that are reputable. 

What are the time periods required to clear bad credit? 

The time periods that negative information will stay onto a credit file varies according to the type of bad credit history. After the relevant time period for each lapse, they are automatically removed. 

Defaults

The normal time that it takes credit defaults to clear-off is five years, but if the person can’t be contacted – also known as a clear-out – it takes seven years.

Bankruptcy

From the date that the bankruptcy finishes, it takes two years for a person’s name to be removed from the credit report, or five years from the bankruptcy is declared. However, the name of a previously bankrupt person is permanently kept on the National Personal Insolvency Index (NPII) which is a database that is publicly accessible. 

Debt Agreements

These also remain on the credit file for five years, with it extending to longer periods in some instances. The name also appears on the NPII for five years from the date of agreement or two years after it ends, whichever of the two occurs later. 

Summons and court judgments

If a writ, summons or court judgment has been issued against a person, then it remains on their credit file for five years. 

Late Payments

Missed or late payments for credit cards or loans are kept on the credit file record for two years. 

Unusually high amount of credit enquiries

Applications for any type of loan or credit card are listed on a person’s credit file for five years, whether they were approved or not. 

Can bad credit be fixed?    

There are some steps that can be taken to improve credit history so that it can be easier to get credit. 

A better understanding of finances

People should check their credit reports regularly so that they can have a clear picture of their credit score and see which credit listings are pulling down their rating. This report also helps them to have a clearer picture of their finances. These histories are available for free from all the national reporting bodies (CRBs) that are listed on the government website. 

Report of errors

Bad credit listings are not correctable, but any errors that appear there can be rectified. What people often don’t know is that if they have been victims of fraud, some of the debts listed on their credit rating may be from there.  If any such issues arise they should contact the credit reporting agency and credit provider to report them and reverse them. 

Bringing debt under control

Debt can be brought under control with a good budget plan and curbing of expenses. Debt consolidation loans and balance transfer credit cards are two popular ways to get out of debt. Debt agreements can also be reached, but may impact the credit rating. 

Striving for a good track record

In Australia, the comprehensive credit reporting system does not only strive to show negative information but also reflects positive information like timely repayments. For those people who are repaying debt, this type of positive information will indicate that they have reformed and are more financially disciplined than before. 

Showing financial stress should be avoided

People should refrain from applying for numerous credit applications, especially if these are in a short period of time, as they will set off the alarm bells at the credit agencies and reflect as financial stress, lowering their credit score. 

Handling finances wisely

Money management does not come naturally to everybody and often in times of financial duress people make the wrong decisions. Expert advice from financial councillors is preferable before things get completely out of control. They help people to better manage their money and also offer advice on the best methods to eliminate debt by helping them understand the importance of debt-to-income ratios.

Other useful hints for those needing to improve their credit scores

Keeping credit cards to well below their limits instead of at their maximum indicates to lenders that the person is a responsible borrower. Another good strategy is to not close older unused accounts as they reflect the history of a lender better than newer accounts do and newer accounts do lower credit scores. 

Show More

Roland Bleyer

Mate produces well-researched content that is unbiased and balanced. Our research team is led by Roland Bleyer who regularly features in the media as one of Australia's leading experts in consumer finance. This year he has been featured on 7NEWS, News.com.au, Womens Day, The West Australia, SMH, Your Money, Channel 10 and many more. Roland's company is an Australian Credit License holder and he is an authorised credit representative. We rely on official government and bank sources as well as data released by Australia's leading comparison engines.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button
Close
Close