In our bad credit score guide:
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?
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.
They don’t necessarily view scores below that as ‘bad’. Just not high enough for them. Another lender may accept the exact same application.
Below average: 0-459
Below average: 0-549
Low score: 1-299
Room for improvement: 300-499
Very good: 735-852
Very good: 700-799
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:
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.com.au.
“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.
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.
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.).
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:
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.
Of course, paying for credit repair does not guarantee your bad credit score will improve. Time, on the other hand, can be a great healer.
|Information affecting credit score||When it comes off your credit report|
Whichever occurs later: 5 years starting on the day you became bankrupt, or 2 years starting on the day you were no longer bankrupt
Current consumer credit obligations
2 years (from the end of the consumer credit)
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
5 years after it’s listed on your credit report
Financial hardship information
Serious credit infringement