How to Avoid and Fix Bad Credit Scores

Cutting up credit cards
How credit scores work and how to improve your credit score

How do you find out your credit score and whether it’s good or bad? What are the real-life consequences of bad credit and can it be improved? If these are questions that you have been asking, you’re not alone. In this article, we break down how credit scores work and how to improve yours.

If you’re dreaming of becoming a homeowner or simply want to be on top of your financial situation, you need to be aware of your credit score and the factors that affect it. A good credit score will increase your chances of getting approved for a loan or a credit card. Inversely, a bad credit score might result in you getting rejected for many financial products. The first step to improving your credit score is understanding what it is and how it works.

Credit Scores Explained

So, what is a credit score? Simply put, it is a rating given to you based on your financial history of the past few years. When you apply for financial products and services, the lender or creditor will look at your credit score to assess your reliability. Your credit score is provided to the lenders by various credit reporting agencies. Be aware that there are some scam pages out there advertising this service, so use one of the main credit bureaus: either Experian, Illion or Equifax. These agencies will provide you with your credit report for free once per year so you can see what credit score they have given you. Now, we’ll break down how to understand and improve your score.

What Is Considered a Bad Credit Score?

Australian credit scores tend to range between 0 and 12,00. The range and what is considered a weak credit score depend on each credit reporting agency’s system. Typically, a credit score is considered poor when it is less than 550.  An excellent credit score is usually somewhere in the range of 800-1200.

What Can Weaken a Credit Score?

Once again, this is something that can vary from one credit bureau to another. Any sign of instability in your financial situation can weaken your credit score, but how much different kinds of actions are emphasised by each agency is not always the same. However, the following listings are likely to negatively affect your credit score:

  • Multiple credit applications in a short period of time. Making many credit applications might cause suspicion that you are under financial stress, which could lead to the credit bureaus lowering your credit score.
  • Late and/or missed payments. If you have outstanding payments that are more than 60 days late and that you have been notified of, credit providers have the right to inform the credit reporting agencies of it. This will result in the agency listing a default against you.
  • Debt agreements. A debt agreement is an act of bankruptcy. It tells the credit reporting agency that you have not been able to pay off everything you owe, therefore making you less reliable financially and lowering your credit score. A debt agreement will show on your credit report for 5 years, or in some cases even longer.
  • Bankruptcy. This one probably won’t come as a surprise. Bankruptcy will show up on your credit report for up to 5 years, affecting it negatively.
  • Credit enquiries. Making many credit enquiries in a short time period can be interpreted as a signal of poor money management or financial problems.

What Happens If I Have a Bad Credit Score?

A bad credit score is essentially a red flag in the eyes of the lender. Most likely, it will affect your chances of lending money or getting credit. Don’t lose hope though, there is light at the end of the tunnel, provided you’re ready to make some changes.

The first thing to know is that information doesn’t stay on your credit report forever. If you start taking control of your finances now, your future will look brighter! Depending on what it is that is bringing your credit score down, the information will stay on your report for 2-7 years. No matter what listings there are against you, you score will rise in a few years if you start working towards improving your credit score now. So, how exactly can you improve your credit score? Let’s get to that now.

How Can I Improve My Credit Score?

Luckily, there’s a multitude of things that can be done to improve your credit score. After all, it is a record of your financial actions, so certain changes will start improving your credit score. Your individual situation will define what you can do, but here are some actions that can be taken:

1. Get a free copy of your credit report, so you know where you stand

A credit reporting agency will get you a free copy once a year, so there’s absolutely no reason not to do it. Once you know and understand your current score, you can start taking steps towards improving it. Check your report annually to make sure there aren’t any mistakes in it. It is not uncommon for creditors and the reporting bureaus to accidentally include erroneous information in a credit report.

2. Reduce your debt

Having less debt will improve your credit score and make you more attractive as a lender. Start taking steps towards reducing any existing debt that you might have.

3. Make all your payments on time

If you have missed payments in the past, avoid doing it from now on, so your credit score isn’t damaged further. Making a realistic budget so you’ll always have enough money to make payments on time will help achieve this. Set aside a day of the week or month where you do all your banking or set up direct debits for your bills and repayments.

4. Avoid making several credit applications in a short time period

Making several credit applications in a short amount of time can be interpreted as a signal of you being under financial stress. Avoid doing this to appear more secure financially, resulting in a better credit score.

5. Make higher repayments

Paying more than the minimum amount in repayments signals that you are on top of your finances and good at managing your money. If possible, start raising your repayments even by a little bit to improve your credit score.

Bear in mind, these actions are not quick fixes, but you will reap the benefits of them in the long run. Improving personal finances is always a marathon rather than a sprint! If this is all new information and you are feeling overwhelmed with your financial situation, you can always call the national debt helpline. They offer for free financial counselling to help you regain control of your finances.

Dreaming of becoming a homeowner? If you are already feel like you’re regaining control, but your bad credit score is still affecting you, our financial consultants might be able to help. Contact us today to speak with one of our friendly and knowledgeable consultants to see if we can offer a financial solution to get you into your own home sooner.

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