So you have a bad credit history, but it’s not a big deal, right?
Think again! Your bad credit is bad for you, and here’s why.
Your credit report, which is held by one or more of Australia’s credit reporting bureaus, contains a range of information about your credit history, which can be either positive (each time you make a payment on time) or negative (loan defaults, missed repayments, Debt Agreements and bankruptcy).
Each time you apply for credit (for example, applying for a credit card, or apply to purchase a car through financing), the creditor contacts one or more of these bureaus.
The bureau takes a snapshot of your credit health by calculating a credit score based on the negative and positive listings in your credit report.
While a one-off missed repayment may not send your credit score spiralling, making a habit of it certainly will. Each negative listing on your credit report will lower your credit score.
But what is a bad credit score?
Here’s a guide to the credit score bands from two credit reporting bureaus:
|Excellent||800 – 1,000||833 – 1,200|
|Very good||700 – 799||726 – 832|
|Good||625 – 699||622 – 725|
|Fair/Average||550 – 624||510 – 621|
|Weak / Below average||0 – 549||0 – 509|
Having bad credit makes you a “risky” borrower. Creditors want to know that they’re going to recoup the money they lend to borrowers, so if you’re a risky borrower, you’re unlikely to be viewed favourably by a creditor in determining whether to lend to you.
Here’s a list of why you don’t want to have bad credit.
1. Harder to get approved for loans: Bad credit will have a detrimental effect on your ability to get a loan approval, but not all options are off the table.
If you have an asset that can be used to secure a loan, you’ll find that you may be able to get that loan.
Unfortunately, without an asset such as a property, you may not be offered a loan, and if you are, it’ll come with a high interest rate.
2. Higher interest rates: As we just mentioned, higher interest rates are going to appear if you apply for credit when you have bad credit.
This is the creditors’ way of compensating themselves for lending to a high-risk borrower.
3. Higher rates for other services: Service providers such as insurance and utility companies often consider your credit score when quoting you their rates.
The lower the credit, the higher the quote.
4. Security deposits: These same providers sometimes also request security deposits before offering their services to those with poor credit.
5. Harder to get approved for a rental property: Landlords may turn down your rental application if you have bad credit.
6. Your options may be limited: Generally, when applying for various types of credit, you’ll find that your options are limited as some lenders won’t offer finance to individuals with a bad credit score.
7. Harder to get out of debt: When charged higher interest rates, and not having the luxury of choosing from the most competitive lenders, means that it can perpetuate your debt and make it harder for you to get out of debt.
For this reason, it’s wise to seek free financial advice for ways to help you get out of debt before you apply for any further credit.