What is a credit score?
Whenever you apply for credit or a loan, whether it be for a car, a house or a credit card, your credit score can play a significant role in the approval process.
Your credit score is a number that reflects the financial history listed on your credit report – including times you’ve paid bills late, made repeated applications for credit, or defaulted on a payment. But starting from July last year, Australia now has a system of Comprehensive Credit Reporting (CCR). This means your credit report also lists positive behaviours, such as paying your bills on time, and they may also factor into your credit score.
Banks and other lenders look at this information to help them determine whether they will lend you money, how much they will lend you and sometimes the interest rate you will be offered. A low credit score suggests that in the past you may have had difficulties paying back what you owe on time, and the lender may decide not to lend to you as a consequence, or they may charge you a higher interest rate than someone with a better credit score.
If your credit score is holding you back, you may want to think about taking proactive steps to repair it, and consider waiting until your credit report has improved before applying for new credit cards or loans.
How long does a poor credit rating last?
Your credit rating (or credit score) is based on the information shown in your credit report at a given time, and according to consumer credit reporting agency Equifax, information can typically stay on your credit report for up to seven years.
Equifax gives the following timeframes for different kinds of information:
|Two years||Five years||Seven years|
While some lenders may look at all the past activity in your report, others may be most interested in your recent actions, within the last one to two years, for example. As a result, having a recent history of making payments on time could be particularly important.
It’s typically a good idea to also make sure all of your past debts are fully paid off, where possible. If you pay an overdue debt, it will still generally be listed on your credit report for five or seven years (depending on the type of overdue debt). However, your credit report will be updated to show you have made payments, which could help your score start to improve.
If you’re struggling financially, wanting to improve your credit score doesn’t necessarily prevent you from seeking assistance. There could be options for you if you need a little extra cash flow and want to get a credit card or loan while your credit score is low, as long as you’re prepared to show that you can meet the conditions of that loan or card.
However, you should do your research and decide for yourself if one of these products is right for you, as they can often come with relatively high interest rates. You may also want to talk to a financial adviser or other expert before committing to a particular product, bearing in mind that having a credit application declined could potentially harm your credit score further.
How to repair your credit score
If you want to repair or improve your credit score, keep in mind that doing so generally won’t be a quick and easy process. It may take a significant amount of time to do, and require an extended period of financial responsibility on your part.
All of that being said, if you want to repair your credit score, here are a few tips on how to improve your credit rating.
It can also be a good idea to obtain a copy of your credit report and make sure any loans, debts, or defaults listed are correct. You can receive a free copy of your credit report once a year from credit reporting agencies such as Equifax and Experian. ASIC’s MoneySmart advises that if you spot a mistake or disagree with something listed on your credit report, you can ask to have it changed, or for comments to be added to your report. It’s free to update your credit report or remove an incorrect listing.
Keep in mind that help is available if you are suffering from financial issues or stress. For example, financial counsellors can provide free information and assistance to individuals experiencing financial difficulties.
Note that financial counsellors are not the same as ‘credit repair’ companies. ASIC’s MoneySmart notes these companies may not always be able to do what they claim and can charge you high fees for things you could do yourself.