A credit rating (also known as a credit score) can play a vital role in a person’s financial life. A good credit rating indicates responsible borrowing and timely repayments, while a bad credit rating suggests a history of late payments or loan defaults. The lower the credit score, the less favourable the terms and conditions for future loans and credit cards. However, it is important to know that there are actions that can be taken to increase a low score. In this article, we will explore what a credit rating is, the factors that impact it, the effect of bad credit, and the steps that can be taken to increase a low credit rating.  

Credit Reporting Agencies

In Australia, credit reporting agencies collect and store credit information and assign each individual a score between 0 and 1,200 based on their credit history. The three credit reporting agencies are Equifax, Experian, and Illion. Regularly monitoring your credit report via one or more of these agencies will identify any negative entries so you can address them promptly.

Legal Protections

In Australia, the Privacy Act 1988 regulates credit reporting, and the National Consumer Credit Protection Act 2009 governs consumer credit. Under these laws, consumers have the right to access their credit reports for free once a year and dispute any incorrect or outdated information. Credit reporting agencies are required to investigate and correct any disputed entries within a specified timeframe.

Activities That Affect Credit Rating

A range of different activities can impact your credit rating. Late or missed payments, defaults, bankruptcies, court judgments, and multiple credit inquiries within a short period can all have adverse effects on a credit score. On the other hand, a history of responsible borrowing, timely repayments, and low credit utilisation can have a positive impact on a credit rating.

Effect of Bad Credit Rating

Having a bad credit rating can significantly affect a person’s financial options. It may lead to higher interest rates on loans and credit cards, limited access to credit, and difficulty in securing rental agreements. A poor redit rating can even affect job opportunities in certain industries where credit checks are standard practice.

Steps to Repair Bad Credit

Repairing a bad credit rating requires consistent effort and responsible financial behavior. Here are some steps that can be taken to improve a credit score:

Step 1: Obtain Credit Report

Every person, even those with no history of borrowing, should request a copy of their credit report every year. It is free to obtain a copy of a credit report every year from each of the three credit reporting agencies. You should review the report for any inaccuracies or outdated information. In particular, pay attention to any unexpected accounts or loans that might be evidence of identity theft.

Step 2: Dispute Inaccurate Information

Any errors or invalid inquiries on the credit report should be disputed with the relevant credit reporting agency. It may be necessary to provide supporting documentation, such as evidence to substantiate a claim that payments were made on time.

Step 3: Pay Off Outstanding Debts

A credit rating can be improved by reducing the number of outstanding debts a person has and bringing payments up to date. If minimum payments cannot be made on all debts, it can be helpful to contact the creditor and try to negotiate a payment plan. It is important to be patient, as improving a credit rating takes time and consistent effort.

Step 4: Limit Credit Applications

Avoid making multiple credit applications within a short period, as each application can generate a credit inquiry, potentially lowering a credit score.

Step 5: Build Positive Credit History

While too many credit enquiries can lower a rating, having too little credit history can also keep the credit score low. People aiming to increase their credit rating may wish to obtain a secured credit card or a small personal loan and make regular repayments to demonstrate responsible borrowing behaviour. However, it is equally important to keep the credit card balances low and try to use no more than 30% of the available credit limit, as high credit utilisation can negatively impact a credit rating.

Conclusion

This information is of a general nature only. There are many reasons why a person’s credit rating may be adversely affected. It is important to understand the types of activity that can impact your credit score and take appropriate steps to maintain a healthy credit score or improve a poor credit rating. If you are served with a default judgment, or are facing potential legal action for a debt-related matter, we strongly recommend seeking legal advice.

If you or someone you know wants more information or needs help or advice, please contact us on (08) 8155 5322 or email [email protected].