A bank makes money by minimising risk.  They want to minimise the chance that any of their customers might default on their loan.  They don’t want to end up on ‘A Current Affair’ for selling a house from under a family of 4.

Part of the bank credit assessment will be to look at your credit score and determine if you have a ‘bad credit’ rating.  If you have defaults or other infringements on your credit file, some lenders will see you as a higher credit risk and may decline your application.   This may result in you being stuck with an uncompetitive rate or unable to achieve your goals.

 

What is Bad Credit?

Generally, when you apply for finance, a lender will request a copy of your credit report to assess your character. This report is like a summary of how financially responsible you are and will outline the good and the bad over the last 5 years.

Poor conduct on your credit accounts will harm your credit score and may impact your chances of being approved for a loan, whether it be for a new purchase or a refinance. The good news is there are nonconforming lenders that are willing to consider your individual circumstances and offer a range of specialised products depending on your level of previous or current credit impairment.

 

Why do I have bad credit?

Good credit (and your credit score) is built by being financially responsible.  Basically, this comes down to paying loans and bills on time.  There can be many reasons for a poor credit history, which could lead to loan applications being rejected by some lenders. The most common are:

  • Missing payments on other loans, credit cards, bills, tax or other types of debt
  • Defaults (a creditor can list your debt as a default if your repayments are overdue for more than 60 days and if they are > $150)
  • Judgements, summons, or writs related to debt
  • Too many credit enquiries in a short space of time
  • Multiple enquiries or facilities with payday lenders
  • You entered a hardship arrangement with your creditor

 

How long will credit impairment remain on my credit file?

  • payment history information will be removed after 2 years
  • a default will be removed after 5 years
  • a serious infringement will be removed after 7 years
  • a notice of court judgment (money order) will be removed after 5 years
  • information about bankruptcy will be removed after 5 years (or 2 years from discharge of bankruptcy, whichever is later)
  • information about debt agreements will be removed after 5 years
  • information about about hardship arrangements entered from 1 July 2022 will be removed after 12 months.

 

Can I improve my credit score?

Building a positive credit score is possible and taking the right steps can assist you with future credit applications.   The first step is understanding what caused your credit problems in the first place.  Secondly, you need to ensure those situations are avoided so you don’t end up with another bad credit issue.

  • Do not miss any payments on loans, credit cards, household bills or other payments. Making payments on time will raise your credit score.
  • See a spending planner to ensure your finances are set up optimally to meet your cash flow needs. Spending planners specialise in setting your accounts up so that you have sufficient funds to meet your obligations as they fall due.
  • Don’t rate shop by applying with multiple lenders at the same time. Each time a lender checks your credit file this reduces your credit score. This can make your financial situation look unstable to lenders.
  • Don’t take out loans for family members – it rarely ends well and if they miss payments it will be your credit file that takes the hit.
  • If you need advice about how to get out of debt or other financial worries, contact Moneybright for a confidential assessment.

 

Conclusion

Bad credit can make it difficult for you to do the things you really want such as buying a home, consolidating multiple debts to provide some breathing space, or getting some cash out for private purposes (such as renovations, surgery and so on).

Unfortunately, people make mistakes or life just gets in the way and takes a financial toll on us (divorce, poor health, losing your job and so on).

The good news is there are lenders that will look at your overall situation and provide you with a bad credit loan tailored to your situation.