My experience dealing with a bad credit score
About seven years ago, I had a ‘bad’ credit score. I had just moved to Australia and because I had no credit history here, most lenders didn’t want to know me.
I worked for a bank at the time, and even my own employer (who knew I could afford a loan) didn’t fancy me. They suggested I get the car loan I needed elsewhere.
I did and ended up paying a high interest rate. You see, your credit score is a reflection of how risky you are as a borrower.
A bad credit score = higher risk = higher interest rate.
If you have a bad credit score, you may be wondering what you can do about it. This guide will help you understand what it means and what your options are.
But first, what exactly is considered a bad credit score in the eyes of lenders and credit reporting bodies?
What is a bad credit score?
A bad credit score in Australia is generally anything in the credit reporting agencies’ lowest credit score brackets. That means credit scores below 549 could be considered bad, depending on the credit reporting agency.
In reality, though, lenders generally don’t use the term ‘bad credit score’ in relation to credit applicants (at least not publicly). Each lender will have its own way of categorising credit scores.
For example, when assessing loan applications some lenders will only consider borrowers with a ‘good’ credit score or better.
They don’t necessarily view scores below that as ‘bad’. Just not high enough for them. Another lender may accept the exact same application.
How credit reporting companies in Australia classify credit scores
Equifax
- Below average: 0-459
- Average: 460-660
- Good: 661-734
- Very good: 735-852
- Excellent: 853-1,200
Experian
- Below average: 0-549
- Fair: 550-624
- Good: 625-699
- Very good: 700-799
- Excellent: 800-1000
illion
- Low score: 1-299
- Room for improvement: 300-499
- Good: 500-699
- Great: 700-799
- Excellent: 800-1000
What causes a bad credit score?
A bad credit score is an indication that there are issues in your credit report. This is a document containing different types of information about your borrowing history.
Negative information that could affect your credit score includes:
1
Late payment of bills, credit cards or loans
2
Missed payments (known as ‘defaults’)
3
Large numbers of credit inquiries in a short space of time (indicating to a lender that you may have had credit applications declined)
4
Applications for credit with ‘payday lenders’ and buy now, pay later providers can be a red flag in particular. Even a single application
5
Changing jobs or address frequently
Of course, in my case, the absence of any credit history was enough to earn me a bad credit score.
“There are so many reasons for a person to end up with a bad credit score,” Graham Doessel, CEO of MyCRA Lawyers, told Money.
“What we find in the most part it's either a simple error, or the person has experienced some sort of financial hardship,” he said.
Errors causing a bad credit score
Doessel says he sees examples on a daily basis of clients realising they have bad credit because of things like an energy bill going unpaid because it was sent to an old address.
He said he’s also seen examples of bad relationship breakups where a partner deliberately doesn’t make repayments on a joint loan to get back at their ex.
“These clients end up with a default they would have easily paid, but now they're listed as a bad credit risk and they can't get finance. It's horrendous,” he said.
What does a bad credit score mean for me?
A bad credit score can limit your ability to access credit in future, either by making you ineligible to be approved with certain lenders, or making it prohibitively expensive.
When dealing with loan applications, lenders almost always do a credit check. The impact of bad credit on your application will depend on the credit product you’re applying for.
The personal loan example below from major bank ANZ illustrates the potential impact (note, the equivalent estimated comparison rate for an excellent credit score was 7.69% p.a.).
How a bad credit score can impact different credit products
Higher interest rates
For personal loans and car loans, a lot of lenders simply charge higher interest rates to applicants with lower credit scores.
Bad credit providers
There are also specialist bad credit personal loan providers, and lenders offering bad credit car loans, you can apply with.
Eligibility for credit
If the bad credit score is due to a serious issue, such as an unpaid default on your credit report, it’s unlikely you’ll be eligible for credit at all.
Home lending
Home loan providers generally don’t change their interest rates based on the borrower’s credit score, but a bad credit score will likely mean you won’t be eligible with a lot of mainstream lenders.
Other ways you may be impacted:
- ‘Non-confirming lenders’ specialise in home loans for bad credit borrowers, but tend to charge higher rates.
- Similarly with credit cards, a bad credit score will limit the providers you will be able to apply with. If you can get approved, it may be with a relatively low credit limit.
What to do if you have a bad credit score
There are a number of steps you can take to improve your credit score if you have bad credit.
For me, improving on my bad credit score meant consistently making repayments on my annoyingly expensive car loan until it was paid off. I actually made extra repayments to pay it off faster and save on interest.
I also got a basic, low rate credit card with the lowest credit limit that was practical and repaid the balance in full every month.
It's important to say, I didn’t get the credit card solely to help improve my bad credit score (I still have the same card today). But building a history of paying off credit on time is a positive signal.
Of course, everyone’s situation is different
But based on information from the experts I turned to for guidance (Moneysmart and Equifax), there are some general rules of thumb when trying to build your credit score:
1
Make sure you pay all bills and make all credit repayments on time consistently (automate your payments if possible).
2
If there are defaults on your credit report, pay them (they will stay on your report but will be marked as paid).
3
Check if there are any errors in your credit report that could be causing your bad credit score. If there are, contact the credit reporting company or your financial institution to have these corrected.
4
Don’t make too many credit applications – only apply if necessary and when you’re confident the product is right for you and you meet the eligibility criteria.
5
Lower the limits on existing credit accounts if possible.
6
Check your credit score regularly to track progress (signing up for free credit score monitoring can be a good way of doing this).
Should you use a credit repair company to fix a bad credit score?
Credit repair is designed to help you fix genuine errors in your credit report. In other words, there’s not much point using a credit repair service if your bad credit score is due to legitimate credit problems in the past.
You can also have genuine errors corrected yourself for free by contacting your financial provider or the credit reporting company.
This is the fairly blunt advice on ASIC’s Moneysmart website:
However, according to Doessel, it can also be possible to challenge negative information on your credit report if the financial institution did not follow the correct procedure when dealing with you. Not everyone will have the expertise or time to do this themselves.
If you're considering credit repair, Doessel says it’s important to check that the company is licensed by the regulator ASIC and has a good reputation based on genuine online reviews.
If you’re unsure, consider getting a recommendation from someone who knows the industry.
“Get a referral from a mortgage broker if you're a mortgage client, or your car broker if you're a car client. Just really do your homework,” he said.
Hot tip: Paying for credit repair does not guarantee your bad credit score will improve. Time, on the other hand, can be a great healer.
When does negative information come off my credit report?
| Information affecting credit score | When it comes off your credit report |
|---|---|
Bankruptcy | Whichever occurs later: 5 years starting on the day you became bankrupt, or 2 years starting on the day you were no longer bankrupt |
Court judgment | 5 years |
Credit enquiry | 5 years |
Current consumer credit obligations | 2 years (from the end of the consumer credit) |
Debt agreement | Whichever occurs later: 5 years from the day the agreement was made 2 years from the day the agreement ended, was terminated or declared void |
Default | 5 years after it’s listed on your credit report |
Financial hardship information | 1 year |
Repayment history | 2 years |
Serious credit infringement | 7 years |
