A bad credit rating can hold back your finances in many ways, particularly when it comes to applying for loans. Your credit history is one of the main elements used by loan providers to assess eligibility for a wide range of products, with negative listings indicating a greater risk to the lender.
Basically, credit history has a huge impact on whether or not your loan applications get approved. But to understand how to improve a bad credit rating, it’s important to first look at exactly what credit history is so that you know what needs to be changed.
The Dun & Bradstreet Check Your Credit website explains that credit is “everywhere”, making it a valuable tool for individuals and lenders.
“It’s used when you apply for mobile phone contracts, credit cards, loans, and much more. A credit report shows how well you manage your finances, and it’s assessed when you apply for new credit,” D&B says.
“When it comes to first impressions, the information contained on your credit report can have a huge impact on your future applications for credit.”
But, as Veda Advantage (the other major credit reporting bureau in Australia) says, your credit history and credit file does not simply state what is “good” or “bad”. It just lists data that lenders independently review when you apply for a loan.
This system can make it hard to figure out if you have bad credit, but if you have been rejected for a loan or know that you have not managed loans well in the past, bad credit is a big risk. This guide looks at exactly what elements are considered “bad” on your credit file so that you can improve them and get a better credit rating.
On This Page
- What are bad credit listings?
- Reviewing your credit report
- Dealing with your bad credit listings
- Using current credit products responsibly
What are bad credit listings?
Bad credit listings are any details on your credit report that indicate poor financial management. Things that could give you bad credit include:
- Late payments,
- Defaults on loans or accounts,
- A high volume of loan applications
- Debt agreements and other court listings; and
These types of listings can be for previous loans, credit cards and even utility bills. They may also stay on your credit file for years, making it hard to get a car loan even if you have dealt with poor credit choices in the past.
Of the elements detailed above, defaults are the most common red flag. A default is a payment that is overdue by 60 days or more, which is when debt collection activity can also be initiated by the lender.
Veda Advantage says that once a debt has been paid the lender legally has to update the listing on your credit file, but that “even after you have paid it off, a default payment will stay recorded on your credit file for five years. This forms part of your credit history.”
Reviewing your credit report
The first step to improve a bad credit rating is to get a copy of your credit report. The three major credit-reporting bureaus in Australia – Dun & Bradstreet, Experian and Veda Advantage – can provide you with a free copy of your credit history once every year. You simply have to provide a few personal details, such as your full name, address, date of birth and driver’s licence number on one of these websites or over the phone.
Credit reporting bureaus will send you a copy of your credit file free of charge within 10 working days, although you can usually get it sooner for a fee. All three of the agencies mentioned above also have resources available to help you understand your credit history and the way that it is laid out (which can vary between agencies). But if you think you have bad credit, the elements listed in the first section of this guide are what you want to look for.
It’s also worth noting that sometimes credit reports contain errors that could also lead to bad credit. MoneySmart says the most common credit report mistakes come from details provided by either the creditor/lender or the credit-reporting agency. But if something like a default or account you don’t know about is there, it could be holding you back when it comes to car loan applications and other forms of credit.
“Be sure to check that any loans or debts listed are actually yours and check details like your name and date of birth,” MoneySmart advises.
“If you don’t agree with what’s in your credit report, you can ask to have it changed or ask for your comments to be added to your report.”
Updating your credit report to remove incorrect listings is free, and MoneySmart recommends contacting the agency or lender to start resolving any errors you think you have found.
As well as mistakes, it is a good idea to check your credit history for any accounts you may have forgotten about. A joint electricity account from a previous relationship or sharehouse, for example, could still affect your credit file if you have not been removed from it years later. Going over your credit history once a year should help you make sure all the accounts and details listed are as fair and accurate as possible.
Dealing with your bad credit listings
A copy of your credit report can act as a roadmap to improving bad credit. A really simple way to use your credit report to build up a better credit rating is to highlight all the negative listings and go through them one by one, considering the following questions:
- How long ago was this incident?
- What was the reason behind it?
- Can I do anything to resolve this listing?
- How has my financial situation changed since then?
Asking yourself these things for each negative listing will help you figure out the best way to deal with each issue. It’s a good idea to start with the oldest bad credit reports first, and work your way to more recent ones, so that defaults or other issues are dealt with in the order they happened.
If you have a default from two years ago that you never dealt with, for example, paying it off now will show up on your credit file within a few weeks. Veda suggests contacting the lender to negotiate paying off the debt, adding that if you have a lot of debts to deal with “you may be able to roll your debts into one consolidation loan in order to pay off your debts faster.” The more defaults you resolve, the better your current financial standing will be and the more likely you are to be approved for a car loan.
But in some cases you may not be able to do anything about the bad credit details on your report. A default can be listed for up to five years, even when it is paid off, so lenders will see previous issues even if you have managed your credit well more recently.
The good news is that recent changes to the way credit history is recorded could reduce the impact of issues you have previously dealt with. The comprehensive credit reporting system introduced in 2014 means that more “positive” details are included on your credit history, including the dates accounts are opened and closed, when payments were made, loan amounts or credit limits, and up to 24 months of credit history.
This new system means that your more recent credit behaviour will become more relevant than previous behaviour. So you could see big improvements to your credit history in a short amount of time if you start repaying defaults and dealing with other negative listings on your credit history now.
Using current credit products responsibly
The new credit reporting system is also an added incentive to make the most of whatever accounts you currently have. Now that your repayment history for the past 24 months can be listed on your credit report, you have an opportunity to show lenders more recent, responsible loan management.
As Veda Advantage said of this system back when it was being considered, newer, more positive behaviour will “counter-balance” previous poor decisions.
“The score will be positively impacted by consistently making payments on time across multiple lines of credit,” Veda explains. This system means you can improve a bad credit rating with the following good credit habits:
- Making payments on time,
- Paying more than the minimum (where possible),
- Limiting loan enquiries and applications (so that there is fewer listings); and
- Dealing with outstanding debts as quickly as possible.
It’s also a good idea to contact your credit providers as soon as you think you may have trouble with repayments. Lenders have qualified experts to help negotiate payment plans when you are dealing with financial issues, so it is much better to take this route than to end up with a default on your credit history.
Once you have dealt with any outstanding issues on your credit file and your finances are in good order, it is just a matter of building up a solid history of good repayments. This means using whatever credit you have access to, but making repayments when they are due (and preferably in full), so that your credit file indicates you can use and manage your accounts. Waiting six months before applying for a loan and making all of your other payments in the meantime, for instance, could indicate to lenders that you are currently in a good position to manage another loan.
Veda also says that the new system is better for people who might accidentally miss a payment, because they will no longer be “blacklisted” for it.
“An individual’s credit score will not be significantly affected by a single event of this type, but a pattern of missed payments and other indicators of credit stress will impact the score.”
So if you forget a payment or can’t make it while you’re on holidays, waiting for a new account to be set up, or for some other short-term reason, there is less need to stress about it negatively affecting your credit score.
Credit history has a huge impact on whether or not a loan is approved, so it is important to make sure your credit file reflects your current financial standing. If you have bad credit, the strategies above will help you improve your rating and increase your chances of getting a loan application approved.
Ideally, you would be able to improve a bad credit rating before applying for a car loan, but this process can take months (and even years in some cases) to have an impact on your credit file. But if you need a car loan now and you are worried about your credit history, there are other options you can consider.
Discussing your situation with lenders, for example, can help you figure out if they would consider your application before you actually submit it. You could also ask about the possibility of getting a partial loan or adding a guarantor to the application so that there is less risk for the lender to worry about.
Another option that is becoming more common in Australia is to look at getting a bad credit car loan. Lenders that specialise in second-chance finance options tend to be more understanding about bad credit ratings, so there is a better chance of you getting the money you need when you need it. But whether you decide to get a bad credit loan or take a chance and apply for a regular personal car loan, make sure you read the terms and conditions so that you are aware of exactly what you are getting.
While credit history can affect the outcome of your car loan application, there is a wide range of other factors to consider. But improving your credit rating means you can increase your chances of getting a good car loan, and also make smarter financial decisions for yourself, so that your credit history stays on track in the future.