From bad to good credit
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In one word - YES! Bad credit can be turned into good credit
There may be no magic overnight formula, but if you currently have bad credit (which can also be referred to as having a poor or below average credit score) there are a number of things you can do to help fix it, starting today.
First, let’s understand what bad credit (or a below average score) looks like and then we will look at 5 easy to follow steps which are guaranteed to help improve your bad credit and increase your credit score.
What does Bad Credit mean?
Bad Credit refers to when your credit history (recorded on your credit file) is considered bad. Missed repayments, loan defaults, debt agreements and bankruptcy are all defined as bad credit behaviour. Credit bureaus then use this information to calculate your risk as a borrower, which is reflected as your credit score.
As a general guide, anything below 550 is considered a bad credit score. A good score is 700 or more and anything over 800 is excellent, however this can slightly vary depending on which credit bureau you obtain your credit report and credit score from.
For example, below are the descriptions and scores Equifax use, but as you can see, they still align closely to our general guide.
| Status | Score |
|---|---|
| Below Average | 0 – 509 |
| Average | 510 – 621 |
| Good | 622 – 725 |
| Very Good | 726 – 832 |
| Excellent | 833 – 1200 |
Knowing what bad credit now means and how it converts to a credit score, let’s look at the most successful ways to improve your credit rating if you currently have bad credit.
5 easy-to-follow steps to improve your bad credit
1. Regularly obtain a copy of your credit report from each Credit Bureau in Australia
In Australia, there are three national credit bureaus who potentially hold their own version of your credit history. This is because lenders or service providers may choose to report their data to one, two or all three of them.
The three credit bureaus are listed below and each can provide you with a copy of your credit report and score.
Experian. (https://www.experian.com.au/order-credit-report-form or phone 1300 783 684)
Equifax (https://registration.my.equifax.com.au/ or phone 138 332)
illion (https://www.creditcheck.illion.com.au/ or phone 132 333)
Once you receive your credit report, your next step is to check that all of the recorded information is correct.
You cannot request information to be removed which is true, (see below) however when mistakes have been made you can arrange for them to be fixed or removed for free.
Examples of what you cannot request to be removed, if they are in fact true.
Payments you’ve made during the last two years (e.g. credit cards, loans or bills) whether you paid them on time or not.
Payments of $150 (or more) that were overdue by 60 days (or more). These will stay on your credit report for five years, even after you’ve paid them off.
All applications for credit cards, store cards, home loans, personal loans and business loans. These also stay on your credit report for five years.
2. Ensure your Credit Report information is 100% correct
If you identify any incorrect information, particularly if it has a negative impact (for e.g. unpaid defaults or missed payments) then you can contact the credit bureau or credit provider to discuss the process of having it updated or removed entirely.
Examples of some typical errors you can look out for are as follows:
By the Credit Bureau
your name, date of birth or address needs updating
a debt is listed twice
the amount of a debt is wrong
By the Credit Provider
An overdue payment of $150 or more was incorrectly listed against you ( must be overdue 60 days or more)
An unpaid debt is listed that you know nothing about
A default (or an overdue debt) was listed, while you were in dispute about it
An agreed payment plan or change to the contract terms was not recorded
An unknown account has been created as a result of identity theft
If you identify anything that is incorrect, make sure you get in contact with either the Credit Bureau or credit provider and have it rectified as soon as possible. This could immediately improve your credit rating and score.
3. Limit how many applications you make for credit
How many applications are too many? Unfortunately, each credit provider will have their own limits so there’s no fixed answer, but every time you complete an application for a credit product (such as a credit card, loan, mortgage or line of credit) and consent to a credit check, it will be listed on your credit report as an enquiry. If you apply with a number of lenders within a short space of time (for example 3 applications within one month), this can cause your credit score to drop, and you may then need to look for a specialist lender who can provide responsible bad credit loans.
Every credit enquiry you make will remain on your credit report for five years whether you’re approved or declined. As mentioned above, too many credit inquiries can hurt your credit score and raise concerns to financial institutions who are assessing your risk as a borrower.
Instead, you should only apply for credit after you’ve done your research and feel that lender/product best suits your situation and credit profile. If your application is rejected, try and find out why from the credit provider and ideally wait a few months before you apply again – it’s also a good idea to check your credit score before you do.
4. Pay your rent/mortgage, utilities and credit facilities on time
Now that Comprehensive Credit Reporting (CCR) has been adopted by the four major banks and many other credit providers, it means that they now report every month as to whether you have made your payments to them on time.
By making your payments on time, this shows any potential credit providers who conduct a credit check on you that you are reliable when repaying a debt and therefore would be considered a lower risk to lend to.
But conversely, if you regularly miss making your payments on time, your poor repayment data will show you are not reliable with managing debts and will instead be considered a higher risk.
Therefore, to improve your bad credit rating (and boost your credit score) start now to make all of your payments on time – especially to those lenders who have introduced CCR.
5. Contact your Credit Provider straight away if you can’t make your payments
All responsible lenders are well equipped to assist any customers who are suddenly faced with financial hardship and are struggling to make their full repayments.
By contacting them as soon as possible, it means there will be more options available to you, such as repayment plans or restructured agreements which in turn can result in the credit provider reporting differently to the credit bureaus so your credit standing isn’t impacted the way it would be if you made no contact and continued to miss your payments.
Why is it important to go from Bad Credit to Good Credit?
Bad credit can stop you from achieving many financial goals such as buying a new car, getting a mortgage or taking out a personal loan or credit card.
The major causes of having bad debt are events such as missed repayments, loan defaults, debt agreements and bankruptcy listed on your credit file, which result in you having a below average credit score and being considered a higher risk to credit providers.
But the good news is, it’s never too late and you can go from bad credit to good credit and improve your financial future.
The key is to understand your credit report, keep up-to-date with what is listed on it and actively do what you can to help maintain and improve it.
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