Everything you need to know about your credit rating and how to improve it.
Your credit history plays an important role in getting approval for products such as mortgages, car loans and credit cards. Essentially, your credit report is a historical summary of all the loans, accounts and other lines of credit you’ve used in the past five years, including the ones you may have applied for but were not granted. This report also contains information about your open credit accounts, repayment habits and payment defaults, as well as legal information pertaining to things like bankruptcy, court writs or judgments, debt and insolvency agreements.
Whenever you apply for any sort of credit, even mobile or internet plans, the details of your application are sent to Credit Reporting Bodies (CRBs), whose business is to maintain and update your credit report. This report is then made available to financial institutions and credit lenders who may consider granting your future loan applications based on your previous history of borrowing and repayment.
In Australia, it’s common for financial institutions to privately determine credit ratings when you apply for any form of credit, including loans, credit cards and credit limit increases. They may never give you detailed information about this “internal” credit rating, but a good or bad credit rating can influence the outcome of your application. Some lenders may also have their own system of calculation to assess the amount of credit you can safely borrow based on this.
If your record tracks a poor pattern of debt repayment, you’ll naturally be considered a high credit risk and may be refused credit or offered a higher interest rate. To discover what’s on your report, request a free copy of your credit history from the CBRs in Australia, such as Dun & Bradstreet, Experian, Veda and the Tasmanian Collection Service (if you’re based in Tasmania).
What is a good credit rating?
In general, a good credit rating will improve your chances of applying for credit at a higher limit with better repayment terms. While lenders are trending towards a more comprehensive or positive system of assessment, until now, the credit reporting system has predominantly focussed on negative marks such as overdue debts and credit infractions.
As such, a healthy credit report is signalled by the lack of black marks like late payments and credit defaults. That said, a blank credit report isn’t necessarily assuring to lenders. Most lenders are likely to prefer someone with a proven record of responsibly maintaining open accounts over someone with no history of borrowing. The characteristics of a good credit report include established credit accounts with low balances, regular repayments made on or before the due date, and a clean legal record.
How can I develop a good credit rating?
- Establish healthy accounts. Having a mobile or internet plan, electricity account or Foxtel service in your name is a good way to establish proof that you are a responsible borrower.
- Make punctual payments. Make sure you pay your bills on time, because this behaviour over time gives potential lenders the confidence that you can be trusted to pay their bills on time.
- Stay free of debt. This is a no-brainer. Lenders will not be inclined to lend you
more money if you’re already heavily in debt and don’t appear able to manage
your money and loans.
- Stay in the same job. Job stability demonstrates responsibility to potential lenders, as well as your ability to repay.
- Stay in the same place. Long-term rental or homeownership also demonstrates responsibility and gives lenders the comfort of knowing you’re not likely to default on your payments and run away.
- Make infrequent credit card applications. Each credit card application you make shows up in your credit report regardless of whether it is approved. Having numerous credit card applications on your report, again, puts in question your ability to manage money and loans.
What is a bad credit rating?
A bad credit rating can result in rejected applications, lower credit limits and more restrictive repayment terms. A bad credit report is usually quite obviously scarred by things like bankruptcy declarations, payment defaults, court charges or court writs relating to finance (e.g. fines, fraud charges, etc.) Less extreme black marks include late payments, high credit balances, and frequent applications for credit (e.g. applying for three credit cards in a month).
Having a lot of active credit accounts can also negatively affect your credit score, especially if you also have issues with any of the above, because it indicates a lack of responsibility in the area of credit management.
What can cause a bad credit rating?
- Numerous credit accounts and applications. Having too many loans to your name isn’t a good look because it puts in question your ability to manage and repay all of them at once. All loan applications stay on record for five years.
- Credit enquiries. Every time you apply for credit, the lender makes an enquiry on your credit history. This enquiry itself is then recorded on the report going forward, leaving a trail of credit enquiries that other future lenders will not look favourably upon. These stay on record for five years.
- Late or skipped payments. Poor payment habits are a definite warning sign to potential lenders so it is always better to make a repayment on time, even if it’s a
small or partial amount. Loan repayment history stays on your record for two years.
- Credit defaults. This happens when a lender takes action to retrieve an outstanding
payment, and stays on your record for five years.
- Court writs and summons. These legal blemishes stay on your record for four years.
- Serious credit infringement or clearouts. If you fail to make payment and the creditor is unable to contact you for more than six months, a serious credit infringement will be marked on your record for seven years.
- Bankruptcy and insolvency. These will stay on your report for five years after the start of insolvency, or two years after the insolvency ends, whichever is longer.
How can I check my credit rating?
There are services in Australia that provide credit scoring, including independent businesses such as checkmyfile, CRBs like Veda which offer credit ratings with their credit report packages, and GetCreditScore.com.au (a joint initiative between Veda and SocietyOne).
Order a copy of your credit file
Receive email alerts whenever specific changes occur on your credit file for 12 months. You also receive a copy of your credit file despatched within one working day.
Receive your credit file with information on:
- Details of consumer credit enquiries
- Details of overdue consumer credit accounts
- Commercial credit enquiries
- Details of overdue commercial credit accounts
- Bankruptcy & Court Judgements
- Writs & Summons
- Information on your current relationship with a credit provider
- $79.95 p.a. annual fee
While the credit scores you get from these services will vary, they can still be useful in giving you a general idea of the types of loans and credit cards you can get. In fact, checkmyfile even matches you up with “lenders who are likely to say yes to your applications”.
The range of details in the report may also vary between bureaus, so it can be useful to request free copies of your reports from all of them to see exactly what’s there and to ensure that they’re all correct. You should contact the credit reporting body as soon as possible if you find any mistakes on your credit history.
Rest assured that the details on your credit history are protected by the Privacy Act (1988) such that only you and authorised agents can access the information.
What are my options if I have a bad credit rating?
If you find that you have bad credit, you may be able to improve it by practising responsible lending habits, such as making payments on time. It could be worth taking stock of all your credit accounts or consolidating debts so that it becomes easier to pay them off, which will improve your credit score in the long run.
There are also credit repair services that offer guidance and counselling to help improve your credit score – but just be aware that some of these services charge money and may not be worth it depending on your circumstances.
You can take comfort knowing that time is on your side in this scenario, because all of your black marks will be erased from the report in seven years if you start developing responsible repayment habits today. Fortunately also, if you can’t wait that long, there are personal loans and credit cards that cater for customers with bad credit ratings. See also your other credit options if you have a bad credit rating.
Finally, knowing your credit rating in Australia could be useful to you in some situations, but it’s merely an indicator of whether you’ll get the credit that you want. In reality, other factors like present employment, total income and current assets also come into play when lenders consider your application.
Alternatives for borrowers with bad credit who need credit
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