You may have saved enough for a deposit on a car or a house, but your dreams may be dashed at the last hurdle if your credit score isn’t up to par.
If you need a loan for a major purchase, your lender will check your credit score to determine your reliability as a borrower.
Get a good score and you can get the loan at a reasonable interest rate. bad score, and you might have trouble getting a competitive interest rate or a lender at all.
How to improve your credit score
If you have caused damage to your credit rating, the first step in redemption is to take responsibility and pay off all outstanding debts.
Experity director Clint Howen says contacting the organizations you owe is the first step to clearing the debt from your credit report.
“For example, if it’s an invoice with Telstra, the process is usually to go through Telstra and say, ‘Hey, I’ll pay off this debt, whatever is left, sorry. How can I take that out of my report?” he said.
If you’re having trouble paying overdue bills that affect your credit score, you can get a loan or use a credit card to help pay it off.
But if you go this route, be careful.
Mr Howen said that if you’re using a loan or credit card to pay off debt, make sure the limit is low; for example, if you are using a credit card, set the limit to $500 instead of $5,000.
“Yes, it works…but be as careful as possible because you can easily end up in a much worse position,” he said.
There are also professionals who specialize in checking your credit report, which can be a good option if you have several problems or need them fixed quickly.
To protect your credit score in the future, Fitzpatricks Private Wealth financial planner Gianna Thomson recommended paying your bills by direct debit to avoid missing a payment deadline.
Loretta Iskra, a professor at the University of Wollongong, said the resources offered by the government MoneySmart websiteand could help you improve your financial literacy and put you in touch with a financial advisor if you need one.
“Often people don’t know what they don’t know,” Ms Iskra said.
“So being able to ask someone else to give their opinion on what’s going on… [is needed] so they can understand the things that are more important in terms of spending and that impact their credit risk. »
How Credit Scores Are Damaged
A common way people hurt their credit score is by not paying even small bills, Howen said.
“Any type of subscription or plan you have, or bills you miss – it’s going to show up on your credit report,” he said.
He said most people get caught up in smaller bills they forget about, like telecom bills, which can haunt them for years.
Ms. Iskra said sometimes you might not even be at fault because a credit company may have accidentally duplicated an application from your credit report.
To make sure that’s not the case, you can check to see if anything on your credit report has been listed twice, she said.
Investors Choice Mortgages director Jane Slack-Smith said sometimes a demerit on your report might not even be yours – for example, you might take the fall of a roommate who didn’t pay the bill on time even though you gave him the money.
That’s why you should request a free copy of your credit report and review it carefully, Slack-Smith said.
You can access your credit report from a credit reporting agency free of charge once every three months.
You can also request a free copy if you have been denied credit in the last 90 days or if your personal credit information has been corrected.
But beware: if your credit report has been requested too many times, it could set off alarm bells for potential future lenders.
How a bad credit score affects your loan application
If you’ve defaulted on a loan in the past, it could automatically disqualify you for a loan from another lender in the future, Mr Howen said.
Even if you end up paying the amount owed, it can take years for the default to clear from your credit report.
He said it could leave you stuck with “non-compliant” lenders who charge higher interest rates and are not regulated by the Australian Prudential Regulation Authority.
Ms Iskra said: ‘Having a good rating really allows you to have a better choice for a better range of options and to minimize costs wherever possible.’