The irony of a credit score is that, a lot of the time, people don’t know what theirs is like until they need to rely on it.
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If you’re thinking of making a big purchase – such as a house or a car – then chances are, you’ll need a loan to make it happen. And chances are when you apply for that loan, your lender will be looking pretty closely at your credit history.
So, how do you know if you have bad credit? And if you do, what does it mean for your loan application?
What is a Bad Credit Score?
Your credit score is basically an expression of the risk of lending you money from the viewpoint of lenders. The number itself is derived from a sum total of your credit history which, when pulled together, is the statistical ‘proof’ of how likely you are to make repayments (for loans, bills etc.) on time – or at all.
Even if you have a broad financial history, with loans and credit cards from a number of banks and other financial institutions, you will only ever have one credit score. The final number of your credit score pools together all of this financial history – from all of the banks and other financial institutions you have ever done business with – and condenses it into a single number.
The number itself sits somewhere between 0 and 1200. The higher your score, the lower the risk - or the more trustworthy - lenders will consider you. Conversely, the lower your score, the higher the risk and the more difficult your credit application will be.
How Do You Get a Bad Credit Score?
To begin explaining how you get a bad credit score, it is first easier to explain how to maintain a good credit score. Most of these things are pretty basic, and are simply what you would expect a potential lender to want you to do.
The keys points are:
- Make repayments on-time – no matter how small
- Don’t miss repayments
- Don’t skip payments altogether
- Pay attention to reminder notices and respond promptly
- Don’t max out your credit cards
- Make the effort to check your credit report regularly to make sure there are no mistakes
- Fix any mistakes that have been made on your credit report as soon as you find them
Getting a bad credit report is easy – just do the opposite of the above list. Even if you do most things on the list, except that you regularly make late repayments, this will lower your credit score. The more late repayments you make, the more your credit score will be adversely affected.
Warning Signs that You May Have Bad Credit
Usually, it is pretty obvious if your credit is not good. If you owe money, the debt collectors who are chasing it will make it fairly clear in a number of ways that they are aware of your deficit. Some of the more serious warning signs include:
- Multiple phone calls from debt agencies
- Multiple letters from debt agencies
- Multiple unpaid bills from one or more providers
- Overdue balances
- Credit card defaults
- Notices of Assessment from debt collectors
Any of the above signs is bad news for your credit report. If any of these apply to you, then it might be time to start thinking about repairing the damage.
How to Check Your Credit Score
Even if none of the above-listed signs apply to you, if you are thinking of applying for a loan then it might be worth your while to check your credit report – even if just for your own peace of mind.
Checking your credit score can be done through Veda, an Australian credit reporting agency. In some circumstances this process is free, but it can take time and requires a written application, proof of identity and some patience. It can be quicker if you are prepared to pay a fee.
Tips for Fixing Your Credit Rating
Once you have a bad credit score, it can be hard to repair the damage. Often there is a Catch-22 involved in getting back on track: to repair your credit report, you need to use credit responsibly. But if you have bad credit, it can be difficult getting access to that very credit you need to use.
Sometimes the easiest way is to start small before you go big. For instance, taking out a small loan or applying for a credit card can be the first step to proving you are financially trustworthy. If you prove that you can make repayments on time with a small loan, then lenders may be willing to give you the benefit of the doubt with a larger loan.
If you have been approved for a credit card, then after some time – for instance, six months – it can be beneficial to ask your lender for an extension of your credit limit.
If you are granted the increase, don’t use this as an excuse to spend more – the lower your debt-to-credit-limit ratio is, the better it is for your credit score.
Ultimately, repairing your credit score takes time and patience. You will need to regain the trust of lenders. Start with a small loan that you are confident of being able to repay. Be very diligent in meeting your repayment commitments, then, over a period of time, gradually increase the amount lenders are willing to extend you and make sure to meet the increased loan commitments. Your 'new' and improved track record will demonstrate that the lenders were right to grant you more credit.
How Will Bad Credit Affect Your Loan Application?
It is not impossible to get loan approval with a bad credit history. Though it can be frustrating and sometimes time-consuming, there are still some lenders who are willing to give you a chance.
For over a decade, Rapid Finance has been helping Australians with bad credit get loan approval to finance their dreams.
If you want to talk about your options for getting a loan with bad credit, call our bad credit experts on 1300 467 274