Dreaming of a new home but dreading your nightmare of a credit file?
Our 6 top tips can show you the path to beating bad credit and boosting your credit score.
Maintaining a good credit file is an important step in securing a home loan. Your credit file will help ensure you’re in good standing to receive a loan with the best terms and rates.
If you’re worried that you may have bad credit, rest assured you’re not alone. There are plenty of Aussies out there battling a less than favourable credit score. Luckily, there are a few easy steps you can take to improve your credit file, starting with understanding what a credit file is and how it’s used.
What is a credit file?
If you’ve ever applied for credit or a loan, a credit reporting body such as Equifax will have a record of your application. This is known as your credit file.
Your credit file contains your credit report. It includes information about your personal loans, previous mortgages, financing, credit cards, and mobile phone and utility contracts. All of this information is used by lenders to understand your credit history and your current credit commitments.
It’s also used to determine your credit score. Lenders use your credit score to decide if you’re eligible for a loan, the interest rate for that loan, and the loan limit.
How are credit scores calculated?
There are a number of different credit bureaus in Australia, and each will use their own credit score system. Generally speaking, your score will be a three digit number between 0 and 1200.
This score is a summary of your credit history. It indicates the likelihood of an adverse event happening in your credit file over the next 12 months. Examples of adverse events include defaults or bankruptcies, which can affect your ability to repay your loan.
Your score is calculated based on a number of factors in your credit file. This can include:
- Types of previous credit providers
- Size of credit previously requested
- Number of credit applications
- Age of your credit file
- Personal details such as age, employment and residence history
- Overdue debts or credit infringements
- Default judgements or court writs.
How can you start fixing a bad credit file?
It’s worth noting that lenders will often consider your credit score in conjunction with their own criteria when determining your eligibility for a loan. So, if your credit score isn’t as high as you’d hoped, don’t panic.
There are also a number of easy DIY tactics you can use to improve your credit score. These include:
As with most things in life, in order to see what’s ahead, you need to understand what was behind. In other words, get a copy of your credit file.
Review your file carefully to understand your credit history, score and any risk factors that may be dragging your score down. Once you know what these are, you can start repairing them.
Equifax, Australia’s leading reporting agency, allows consumers to request a free credit file every 12 months. You’ll need to answer a few questions to confirm your identity, and your file should be sent within one business day.
Remember to keep your eye out for any inaccuracies when reviewing your credit file. Credit report errors aren’t that common, but it can happen.
Review all of your personal details to make sure they are correct. You should also check all of the credit cards and loans noted on your credit history to ensure you recognise all of them. Look at the major purchases and review outstanding debts. If there are any defaults, make sure you recognise all of them.
If you see anything that doesn’t look right, report it and be prepared to back up discrepancies with evidence.
Existing loans and outstanding debts can be a problem if you’re not consistently paying them off. In addition to being stressful, they can appear as a risk factor. Depending on the amount you borrowed and how long it took you to pay it off, these can remain on your report for some time.
Get your financial self organised, and work toward paying off those debts as soon as possible. Establish a budget that allows you consistently make payments on time, and stick to it. Along with working toward paying off your debt, demonstrating a consistent repayment history is viewed favourably by lenders.
Once your debts are paid, your credit score will likely improve.
Did you know that bills totalling $150 or more that are outstanding for more than 60 days are recorded as a default in your credit file? This can affect your credit score for up to five years.
Paying your bills on time is possibly one of the biggest credit score influencers. It’s also one of the easiest to fix. If you’re behind on any payments, catch up as soon as possible. Make a strong effort to continue making payments on time, every month. This applies to existing mortgages and personal, auto and student loans. It also applies to your rent, utilities and mobile phone.
It may take time for these improvements to be reflected in your credit file, but lenders can see your ability to consistently meet your financial obligations.
If you’ve never opened a line of credit or taken out a personal loan, you may not have a credit file or credit score. This can make it difficult to apply for a home loan because lenders are looking for evidence of responsible repayment behaviour.
This is why maintaining an active credit balance can be a good thing. Opening a credit card with a small limit can help you establish your credit file. Regularly paying off your balance helps to boost your credit score.
It shows that you can responsibly handle your credit commitments, which lenders will appreciate when considering your eligibility for a loan.
Every time you apply for credit or a loan, a “hard inquiry” note is added to your credit file. Too many hard enquiries over a short period of time will bring your credit score down.
Lenders may also view this as a negative, especially if you’re applying for credit when you’ve already overextended yourself.
Luckily, this is a quick and easy fix — don’t apply for any credit that you don’t absolutely need.
Keep in mind that improving your credit file won’t happen overnight, but stick with it. Your efforts, no matter how big or small, will pay off!