The real life guide: Your credit report
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Estimated read time: 7 Minutes
If you’ve missed a payment or defaulted on a utility bill, credit card or personal loan in the past, then you might find yourself with a less-than-stellar credit score. If you’ve got credit repayment issues, getting a home loan can be a challenge.
This real life guide explains the credit report problems that might affect your ability to get a home loan and what steps you can take to improve your credit report.
So what is bad credit?
Well, bad credit, or ‘adverse credit’ as it’s sometimes called, is when you have a lower-than-average credit score, which can impact your ability to get new credit. Our guide covers many of the key questions that relate to your credit history and your credit report.
What are the reasons for a lower credit score?
It helps to know the reasons why you might have been declined for a loan or credit card. Some common things that might lower your credit rating are:
What are the impacts of a bad credit score?
Unfortunately, a low credit score can mean that some lenders will not approve a loan application. This is because the information on your credit report tells the new credit provider how you’ve treated existing and past debts, which gives them an indication of how you’re likely to pay back the new debt. This is called ‘creditworthiness’.
Other lenders might accept your loan application – but they could apply a higher interest rate to your loan, because you represent a higher risk.
How long does a bad credit rating last in Australia?
To help you better understand how your financial history can impact your chances of home loan approval, we’ve pulled together an outline of how long certain information remains on your credit report.
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5 years
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Credit inquiries
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2 years
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Late payments
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5 years
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Defaults
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5 years
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Court judgments and writs
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5 years
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Bankruptcy or Part IX debt agreements
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7 years
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Repossessions
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7 years
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Clearouts (serious credit infringements)
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5 years
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Debt agreements (related to bankruptcy)
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Up to 2 years
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Comprehensive credit reporting
It’s worth noting that the durations are just a general guideline for the timeframes that these events may appear on your credit report. Remember that individual credit reports can vary, and other circumstances can influence how long the information remains active on your credit report. If you’d like to find out more then you could refer to the official guidance provided by the Office of the Australian Information Commissioner (OAIC) ^.
Reference: ^ https://www.oaic.gov.au/privacy/your-privacy-rights/credit-reporting/what-stays-on-a-credit-report
What exactly is a credit score?
Credit reporting bureaus (well-known ones in Australia include Illion, Experian and Equifax) use credit reporting data to calculate an individual’s credit score. A credit score considers the following:
- Your repayment history of loans and other credit facilities (specifically if you have missed minimum monthly repayments)
- Any defaults
- The types and numbers of credit limits
- The dates credit facilities were opened and closed
- The number of recent credit enquiries (like credit card, store card or loan applications)
- The types of credit applied for
Credit scores typically range from 0 to 1000. Generally, the higher the credit score, the better.
As of 1 July 2021, banks are now required to provide a holistic picture of your credit history – showing both positive and negative data. This means that positive credit behaviour can balance out issues you've had in the past.
So, if you've had a couple of credit issues previously, then all is not lost – you can work to create positive credit activity that shows you’re a creditworthy borrower.
How can I keep my credit score healthy?
What can I do if I have a bad credit history?
1. Get on top of your credit report – and fix the problems
The first thing you should do is get a copy of your credit report. Having a copy is the first step in planning to improve your score. You can make sure you’re aware of the positive and negative reporting on your credit report. And you can check if there’s something in there you’re not aware of, or even mistakes.
If any information is wrong, then make a request to have it corrected so that it doesn’t continue to affect your credit report. Speak to a credit reporting agency, or the relevant credit provider if you believe there has been an error.
Defaults will remain on your credit report for five years, however they can change to a ‘paid default’ if the debt is repaid. In addition, many lenders will want to know what actions you’ve taken to address any past credit problems, so it’s best to make sure that any defaults get paid off.
2. Consider consolidating your debts
Consolidating your debts may be an option; either through a personal loan facility or rolling multiple debts into your home loan. This could reduce the number of repayments you need to make each month, whilst also minimising the number of open credit accounts listed on your credit report. This may make your finances easier to manage by making fewer payments each month, and if you find the right lender, you might just save on interest and loan admin fees, too.
3. Shop around
Your credit score may have resulted in a declined loan with the first lender you applied with, but there may be others who can help; lenders may have different criteria for loan applications.
It’s important to remember that multiple credit applications within a short time frame can be harmful to your credit score – so ensure that you do your research before submitting an application for a loan.
4. Consider lenders with alternative scoring model or credit assessment approaches
Many traditional lenders use an automated credit-scoring model to determine whether or not your loan should be approved. A specialist lender (like Pepper Money) will look at your individual application and consider your current financial situation in addition to your credit report.
What can I do if the banks have already declined my home loan application?
You don’t have to give up at the first no. Having a home loan application declined happens to many people every year and it can be discouraging to say the least. However, the good news is there can often still be a way forward by looking to alternative lenders that may offer more real life options.
What is considered impaired credit?
Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.
All applications for credit are subject to credit assessment, eligibility criteria and lending limits. Terms, conditions, fees and charges apply.
The results of the borrowing power calculator are based on information you have provided and is to be used as a guide only. The output of the calculator is subject to the assumptions provided in the calculator (see 'about this calculator') and are subject to change. It does not constitute a quote, pre-qualification, approval for credit or an offer for credit and you should not enter commitments based on it. The interest rates do not reflect true interest rates and the formula used for the purpose of calculating estimated borrowing power is based on the assumption that interest rates remain constant for the chosen loan term. Your borrowing power amount will be different if a full application is submitted and we complete responsible lending assessment. The results in the calculator do not take into account loan setup or establishment fees nor government, statutory or lenders fees, which may be applicable from time to time. Calculator by Widgetworks.
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