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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.
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 'bad' credit lasts for is hard to quantify, as different elements are recorded for different time periods. Any credit issues (such as defaults) stay on your credit report for six years from the date they were recorded. This means that if you defaulted on a bill, it will still be reflected on your credit score for six years. Meanwhile the previous 24 months of repayment history from your open and recently closed credit accounts is recorded on your report. Credit enquiries (for example, applying for credit cards or loans) are split into two buckets; recent and historical enquiries. Recent enquiries are classed within the past three months, while overall enquiries are recorded for six years.
You could ask your financial institution to reduce your credit card limit, this will cap the amount you can spend and keep your level of debt under control. It’s always better to get into the habit of managing your money, rather than allowing credit card debt to grow. If you have outstanding debt more than one credit card, you should consider taking action immediately to address the problem.
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.
Do an annual credit health check
- 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 here.
Remember you can always speak to us here at Pepper Money on 137 377 if you’re unsure on where you stand.
You might also ask:
What is considered impaired credit?While there is no strict definition, someone that is considered to have 'impaired credit' would have a substantially lower-than-average credit score and may struggle to get finance or a line of credit approved from a mainstream lender.