The real life guide: Your credit score
Estimated read time: 7 Minutes
If you’ve missed a payment 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 below 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 low 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 and less favourable terms 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
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1 year
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Financial hardship information
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) 1.
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. A below average credit score is defined by Experian as a score of 549 or less.
Many Australian lenders are now providing 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?
Be smart when applying for credit
Your credit report will show when and how many times you’ve tried to access credit, and this can impact your credit rating. Keep your credit score healthy by:
- Only applying for credit when you need it
- Doing your research beforehand – find out when a credit enquiry will be completed on your credit file
- Not borrowing more than you can handle
- Prioritising repaying existing debt before applying for more credit
- Accepting a smaller credit limit whenever possible, and turning down credit limit increases that you may be offered
- Speaking to your lender if you are struggling to make repayments
Do an annual credit health check
You can access your credit score for free every three months through credit reporting bodies Illion, Experian and Equifax. This could help you:
- Plan ahead so you’ll be in a good position when the time comes to apply for a loan or credit card. If your credit score needs to improve you can work on improving it before applying.
- Contact credit reporting bodies Illion, Experian and Equifax if there are errors in your credit report. You can get any errors fixed for free.
- Be alert to fraud. Check your credit report to ensure that no one is using your name or identity to take out loans or other credit. Learn more about protecting your identity.
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.
On the other hand, combining your debts could lead to higher monthly repayments and a longer loan term. So it’s important to work out what might work for your individual situation.
3. Shop around
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.
That being said, although your credit score may have resulted in a declined loan with the first lender you applied with, there may be others who can help; lenders may have different criteria for loan applications.
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.
Understanding mainstream banks’ lending criteria can help
The ‘big four’ often offer some of the lowest headline interest rates, however they also often have the strictest credit eligibility criteria. This means, for example, that their home loans are only available to customers with a good-sized deposit, a PAYG income with enough buffer to withstand rate rises, and a squeaky-clean credit history.
This means, as a borrower, you may have had no issues getting a loan previously, but you might be declined today because of changes to a lender’s credit policy and criteria. If your credit history is the only thing holding you back, you may want to consider a lender such as Pepper Money.
Lenders like us offer real life loan options – we may be able to help
While it can be disheartening to have been declined a home loan due to your credit history, there may be light at the end of the tunnel. We look at each case on its merits, meaning your application is assessed individually by an underwriter against our loan eligibility and credit assessment criteria – and your overall credit situation.
So your application is assessed on its overall merits, by a person, not simply judged against an overarching credit score by a computer. This means that if you have defaults or judgements on your credit report, we may still be able to consider your application.
Resources that can help when you are dealing with credit issues
The Government website, Money Smart, has a really helpful section on budgeting with some easy-to-use calculators, including a simple downloadable budget planner.
They also offer resources to help people dealing with debt collectors.
And if you are feeling overwhelmed, don’t do it alone. Money Smart offer places to get help if you need support.
What is considered impaired credit?
Contributor | Neil Culkin, Head of Credit and Settlements
Neil has a 20-year career in credit provision. At Pepper Money, he oversees the underwriting and credit control of all consumer finance loan applications. He is also responsible for updating lending policies and guidelines. Read more.
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Resources to help with credit issues
It can be tough to recover from a credit event. We've put some resources together to help you get back on-track.
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