If you are unfortunate enough to have a weak credit score, it can feel like you have hit a major roadblock. After all, if you apply for finance, there is a high chance of you being rejected.
The sad reality for many Australians is that poor credit history isn’t the result of reckless spending. Instead, it can stem from a range of factors including job loss, illness, rising living costs, a business that didn’t work out, or a relationship breakdown.
However, it is important to recognise that while a bad credit score can make certain things more challenging, it doesn’t mean your opportunities have disappeared completely. Indeed, thousands of Australians successfully rebuild their finances every year, enabling them to secure funding when they need it and continue working towards their personal and professional goals.
Your credit score is a snapshot of where you’ve been financially. It is not a prediction of where you’re going. With that in mind, let’s take a look at what you can do to improve it and your overall creditworthiness.
What Does Having a Weak Credit Score Actually Mean?
A credit score is a number between 0 and 1,200 that indicates how much risk you represent to lenders if you want to borrow money from them. It is calculated by taking into account the following factors in your financial history:
Missed repayments
Loan defaults
Multiple credit applications
Late utility payments
Financial hardship events
Bankruptcy or debt agreements
Essentially, the higher the score you have, the lower the risk you represent as a borrower. This should make it easier to get loans and secure better interest rates. However, if your score is below 500, it can seriously hinder your chances of being approved for a loan.
It is not impossible. Some companies specialise, for instance, in poor credit personal car loans. However, it does make things much harder. Thankfully, while lenders often use a credit score as part of their assessment process, it is rarely the only factor they consider.
Many people assume a bad credit score is permanent. But it is not. There are plenty of things you can do to improve it over time.
How to Check Your Credit Score
It is actually surprisingly easy to check your credit score in Australia. Under Federal Law, you are entitled to obtain a free copy of your credit report and score every three months from either Equifax or Experian. The two major reporting bodies.
Additionally, platforms such as Finder or Canstar aggregate this data. They allow you to easily track your score and report for free on a month-to-month basis.
To verify your identity online, you will typically need to provide 100 points of ID. This can include details from documents like:
Australian Driver’s License
Passport
Medicare Card
Once you have received your report, be sure to check it for any errors. If you spot any, you can legally request a free correction.
Can You Still Achieve Your Goals With Bad Credit?
It is important to understand that having a bad credit score is not a personal label that will stop you from achieving what you want to. Instead, a low credit score simply reflects previous financial circumstances. It does not measure your work ethic, ambition, skills, or potential.
Many successful business owners, professionals, and entrepreneurs have experienced periods of financial difficulty before achieving financial success, including Walt Disney, Elton John, and George Foreman. There is no reason why you can’t do the same. You just need to adopt a similar positive mindset to theirs and manage your money wisely.
This involves focusing on what you can do to improve your situation, rather than dwelling on what got you into it in the first place.
What Steps Can You Take To Improve Your Credit Score?
If you have a low credit score, something you should hold on to is that it is entirely possible to improve your score. However, the key to doing so is that you need to develop good financial habits.
This should involve doing the following:
1. Pay Your Bills On Time
Your repayment history is one of the most important factors in your credit score, which is why it is essential to pay all your bills on time, every time. Even one missed payment can affect your score. That is why it is a good idea to set up automatic payments or direct debits for costs such as utilities, rent, and minimum credit card amounts.
A good strategy might be to ensure all of these payments go out on the day you get paid. That way, you won’t be tempted to spend the money as soon as you get it on other things.
2. Reduce Your Debt
If you have any existing debt, you are recommended to try to pay it off as soon as possible. Generally speaking, the less you have, the more favourably it will be looked upon. This is particularly the case for credit card debt, which tends to reflect your regular lifestyle spending.
If you can’t yet pay off your full outstanding balance, try to ensure it is at least 30% below your credit limit. Additionally, if you have an overdraft, make an effort to return to the black as soon as possible.
For those who are really struggling with their debt, it might be worth calling the National Debt Helpline.
3. Don’t use your credit card
If you are trying to rebuild your credit score, it is wise to reduce your credit card use. In an ideal world, you should consider cancelling it completely once you have paid off the existing balance.
That said, if you want a bit of security, perhaps reduce the limit to between $500 and $ 1,000 to keep it more manageable.
4. Limit new credit applications
Many Australians are unaware of this. But every time you apply for a loan or credit card, a “hard inquiry” is recorded on your file. This temporarily lowers your score, even if you are successful, so try not to make any new credit applications unless necessary.
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