If you’re in the market for a big ticket purchase, chances are you’ll need a good credit rating to get loan approval – and amongst all the excitement of shopping for your new house or car, it’s easy to overlook the state of your credit file.
While most of us have never seen our own records, having a bad credit rating will disadvantage you when it comes to securing a line of credit. A tarnished record can lead to being declined for home loans, personal loans, car loans, credit cards and phone contracts.
Even if you do get approved, having a bad credit file will mean you’ll probably pay thousands of dollars in extra interest because in the lender’s books, you’re a high risk borrower.
Your credit rating is important because it is a record of all your credit applications and lists any history of bankruptcy and defaults. A default is listed on your credit file if you failed to pay on three consecutive instances, and when a payment plan has not been negotiated with the lender.
According to Veda Advantage, the key points of information lenders look for when assessing credit files are:
- Bankruptcy. If you have a bankruptcy, debt agreement or personal insolvency agreement recorded, discharged or undischarged, your application will be declined.
- Paid or unpaid judgements, writs and summons.
- Overdue accounts.
- Defaults or paid defaults. Paying a default does not remove it from your credit history.
- Enquiries. If you have made more than one credit enquiry over six months, your application may also be declined.
Australia employs a negative credit reporting system, meaning that only negative actions are recorded. Unfortunately there is no record of your “good credit”, so having much information on your credit report can spoil your chances of getting approved. This same information can also determine the interest rates you pay plus the fees that financial institutions will charge.
Many people believe that they can improve their credit rating by simply paying back their debts, however it’s not always that simple. For example:
- When you pay an overdue debt, the negative listing doesn’t disappear until after seven years have elapsed.
- Credit providers can decide to reject you for minor defaults; even a missed phone bill can stop you from securing a loan.
- If you are more than 60 days behind with a debt, your creditor can list this on your credit history. Even if you pay the debt it may be listed as a ‘paid default’.
- If you changed address and phone number without telling your creditors a default may be listed as a ‘clear out’. This is considered a more serious offence, as it could be seen as deliberate debt evasion.
- If you have a bad credit history plus outstanding debts, you won't be able to get a debt consolidation loan because you are classified as high risk. The only option is to repay your creditors with regular payments via a debt agreement and/or personal insolvency agreement.
How to avoid tainting your credit file
At the end of the day, creditors conduct credit history checks to be certain that they are lending to a responsible customer. Having a bad credit rating is similar to having a criminal history; it can follow you around and render you a less-than-desirable candidate, even years down the track.
The best way to care for your credit file is to repay any outstanding debts and ensure your records are up to date. Make sure you know when your payments are due and pay on or before the due date. If you fall behind on repayments, be proactive and call the financial provider to explain why you’re late - often a good reason will be taken into consideration. Lastly, if you are unable to repay the amount owing, ask if you can come to an arrangement.
Click here for more information about your credit file.