- Reasons for a bad credit score
- Check and correct wrong listings on your credit report
- How to improve your credit rating
- How to Save Money
- How to consolidate debt
- Alternatives to loans
How good is your credit score? Bank or non-bank lenders approve or reject your loan application based on the number they see on your credit report. If your score is ‘good’, they will likely offer you a lower interest rate; if you have a ‘fair’ score, expect the rate to be higher, which means you will pay out more over your loan’s lifetime.
Your credit report presents the facts about your credit history. Your credit score tells lenders how risky a borrower you are. Your reputation as a borrower is evident by the numbers on your credit report.
Lenders source your report from credit reporting bureaus (CRBs) Experian and Equifax. Credit reports share negative data such as defaults and positive behaviours like making all payments in the previous year. Known as comprehensive credit reporting (CCR), Australia’s credit reporting system offers a balanced view of borrower reputation, ensuring that a single negative event does not significantly impact your credit score.
CCR is a change from the previous practice of reporting only negative data on credit reports. And it’s making a positive difference to credit scores. Borrowers previously rated ‘good’ have improved to ‘very good’ in response to making payments on time. For lenders, CCR offers greater clarity on borrower behaviour and creditworthiness, supporting their responsible lending objectives.
Credit score systems from Equifax and Experian
Credit Band Equifax Experian Excellent 833-1200 800-1000 Very Good 726-832 700-799 Good 622-725 625-699 Fair/Average 510-621 550-624 Weak/Below Average 0-509 0-549
Reasons for a bad credit score
A number of listings on your credit report can bring down your credit score. They include the following:
- Late or missed payments on loans and credit cards stay on your report for two years. Timely repayments make you look like a trustworthy borrower.
- Credit defaults (overdue debt) stay on your record for five years.
- Multiple credit inquiries* are recorded on file every time you apply for a loan or credit card and regardless of whether your application was approved or rejected. Multiple credit inquiries over a short period of time may make you appear risky (if lenders assume your applications have been denied) or over-committed (if you’re already making multiple repayments, you may find it difficult to meet new credit obligations).
- Court writs or summons mark you out as a risky borrower and stay on your report for five years. You can file a Notice of Intention to Defend if you will be arguing that the creditor (plaintiff) is not entitled to the damages being claimed.
- Bankruptcy stays on your report for five years from the date of declaring that you are bankrupt and two years from the date your bankruptcy ends.
Ariana had taken out a personal loan from her local bank. She took care to make her scheduled repayments on time. So imagine her shock when she received a default notice on her loan. When she contacted her bank, they apologised and said that a processing error had prevented cash from being electronically debited from her transaction account for three months. The bank resolved the matter and Ariana paid off her loan within the next six months.
A year later, Ariana applied for a car loan and was dismayed to see her application rejected. When she checked her credit report, she found the default listing from her personal loan. She took up the matter with the bank and they took the necessary steps to remove the incorrect listing. She reapplied and this time, had no problem getting the car loan.
As a best practice, you should check your credit score once a year. Here are the steps of action:
- Get in touch with your credit provider. Request them to investigate the error and have your credit report amended. As credit reporting bureaus have a list of most credit providers, they can easily contact your credit provider to verify the correction request.
- Next, submit a change request to the CRB online or via post. Note that there is a consumer section and a commercial section; choose the consumer/public records section of your report as the commercial section pertains to the business credit report concerning company/commercial matters.
- The CRB will then investigate your request and take it up with your credit provider on your behalf, review their response, make the correction if an actual error has been committed, and provide you with an updated copy of your credit report.
- The CRB is legally bound to notify all recipients of your credit report about the correction within three months prior to it being made. If the investigation reveals that the particular listing being challenged is accurate or correct, the CRB will notify you explaining why the correction was not made.
You can request a copy of your credit report from Experian and Equifax for free once a year; if you’ve applied for and been denied credit within the past 90 days; or when you have requested access for the purpose of correcting some information in your credit report. CRBs are legally required to issue your credit report within 10 days of submitting the request.
The sooner you check your credit report for possible errors, the better. The new rule on reporting positive behaviours is a good opportunity to enhance your borrower reputation. If a correction shows that you have paid your debts, then lenders will feel more motivated to approve your credit application.
Lenders usually look at a borrower’s most recent activity. If your credit history over the past year or two shows timely payments, lenders may overlook any negative listing occurring years ago.
Avoid late payments as much as possible
For starters, it is worth going the extra mile to stay current on your loan(s) and credit card(s). One or two late payments may not make a difference, but avoid making a habit of it, and stick to your payment schedule consistently.
Don’t miss payments – negotiate with your lender
It is also important that you don’t miss payments altogether. This can understandably be difficult if you have multiple payments to make every month – credit cards, mortgage, utility bills and other loans (if any). Utility companies tend to actively report outstanding payments to CRBs. You may get a grace period of 60 days from the last bill and beyond this time, expect a negative listing on your credit report.
If you’re facing or you anticipate a cash crunch for whatever reason, consider negotiating a different payment schedule with your mortgage or unsecured loan provider. They will most likely work out an alternate arrangement with you to ensure that at least partial payments are made until such time that you are able to return to your original payment schedule.
Keep credit limits low
Though your credit report does not list your outstanding debt, it shows the credit limits of all your credit accounts. A high limit is a red flag even if you have paid off most of the debt on that account. The other reason is that a lower credit limit helps you manage your spending more easily and stick to your savings/debt consolidation plan.
That being said, there is a bit of debate about whether you should keep the credit limit on your credit cards high or low. By decreasing your credit limit, you will be increasing your credit utilisation ratio – the amount of credit you’re using divided by the amount of credit available to you. As the credit utilisation score makes up some part of your credit score, increasing it may hurt your score.
If your financial circumstances or saving habits help you pay down debt without difficulty, then you could consider high limits. On the other hand, if you believe that doing so may pile up your overall debt over time, you should opt for lower limits. Even though it could impact your score negatively in the beginning, it will prevent debt from getting unmanageable and stressful in the future.
Do you really need new credit?
CRBs and lenders will regard a new application for another loan or credit product warily, particularly if you’re already using multiple credit cards or have outstanding loans.
Determine if you really need another loan. If an external source of credit is absolutely necessary at that point in time, are you better off choosing an alternative, such as a line of credit?
What you should definitely avoid is making multiple credit applications over a short period of time. This is a warning sign that you’re in financial distress and will prompt lenders not to extend credit to you. And yes, it will also negatively impact your credit score.
Making new credit applications is problematic as long as you’re increasing your debt. Your credit rating won’t be adversely affected if you switch from a current high-interest product to a low-interest product.
Maintain a healthy balance of credit and loan accounts
How well you honour your payment obligations will either push up or drag down your credit score. It is easy to start building your credit profile, but ensure a responsible approach: only take on what you can reasonably pay back.
If your salary can cover the costs of your monthly auto loan and a low-interest credit card, as well as allow you to meet other expenses comfortably, you should get that loan quickly. An electricity account, internet plan and Amazon/Foxtel/Netflix/Stan account will help you establish good credit ratings as long as you can afford the payments.
Don’t leave your card unused/inactive
An unused credit card won’t contribute to your credit rating and may actually be counterproductive by suggesting that you’re not a savvy money manager. It can be as simple as using the ignored card for one-off purchases or reserving it for larger expenses, such as a flight booking or hotel accommodation.
Check if the card offers a money back/cashback guarantee or reward points so you can actually profit by using it.
Make additional payments where possible
A proactive approach to paying down your loan quickly has many benefits. For one, you will be debt-free sooner. For another, it will indicate your financial prudence before CRBs and lenders.
Even if your monthly repayments are automatically debited from your account, try to pay down more as and when you can. If you have taken out a mortgage, one option is to make one extra payment toward the principal balance every year or every 2-3 months.
Also, consider these tips to maintain a good credit profile:
- Inform your credit providers about a change in contact details or address sooner rather than later.
- Check your bank account statements frequently for debit history; if the date of the direct debit mandate is over and debit has stopped, yet your debt is still not paid fully, take up the matter immediately with your credit provider.
- Avoid relocating to a new location frequently. CRBs and lenders view long-term renters (and homeowners) more positively than frequent movers.
Maintaining a trustworthy buyer profile is challenging if you don’t manage your finances judiciously. As we transition from one life stage to another – from enjoying the single life and getting married to starting a family and increasing our earning potential as we slowly start inching towards our retirement years – how well we save, invest and spend will determine the life we can create for ourselves and our loved ones.
Steps to save money
Assess your situation: The first thing you need to do is to take a good look at how your cash flows. You need to calculate your monthly income and then find out what your total monthly expenses are. If your expenses are well within your income, then you are in a good place. If your expenses equal to or exceed your income, then you might find yourself going into debt.
Expenses less than income: When your expenses are less than your income then you already have money left over at the end of each month. Depending on how much money you have you can budget for putting some away in a separate account as a rainy day or emergency fund. Keep a little behind in your original account for any situations where you might need easy access to cash.
Expenses equal to or more than income: If you are cleaning out your bank account by the end of each month then it is only a matter of time before you could find yourself in debt. If you are faced with any kind of emergency, you might need to borrow the money to cover additional expenses. If you are already spending more than you earn you are already in debt. In both these cases, you need to re-evaluate your spending. Look at the expenses you can cut back that aren’t necessary, saving money in the little places is what makes the difference.
Check your outflow of cash: Examining how much you spend each month doesn’t have to be tedious but has to be thorough. You need to be aware of every area where cash is flowing out.
Look at all your bills; electricity, phone, credit card, food expenses, groceries, shopping, student loan payments, and so on. Make sure to not leave anything out. Have a very clear picture of how much money is being spent per item each month.
Where can you cut costs?
Once you know where your money is being spent you will be in a better position to reduce your expenses. Some ways you can do this are:
- Use electricity more judiciously to bring down your power bill.
- Eat out less and cook at home to bring down cost of food.
- Budget for groceries and stay within the budget.
- If cooking at home is not possible, then find cheaper places to eat.
- Stop buying new clothes, shoes, accessories, devices and so on unless absolutely necessary.
- Use coupons and discount vouchers where you can.
- Use cash instead of a credit card to avoid overspending.
- Pay all bills in full to avoid accumulating interest.
If you find that you have the habit of spending on certain items especially if you don’t really need them, then try and cut down on that spending. You might need help with your budgeting or even with compulsive spending, it’s okay to ask for help.
According to debt management professionals, you need to tackle debt on a priority basis when:
- You are having to cut back on food
- You cannot manage any savings at the end of the month
- You only make minimum payments on your credit cards
If debt makes up more than 20% of your income, you’ve got a debt problem. Financial counsellors view ‘over-indebtedness’ – too much debt that isn’t likely to be paid back – as a situation where you miss more than two bills over a six-month period or find it exceedingly difficult to make your monthly payments.
This is when you need to take a hard look at your saving and lifestyle habits, and embark upon a debt consolidation plan.
What is debt consolidation?
Debt consolidation is the process of combining all your existing debt into a new debt where you only need to make one or fewer monthly repayments. The goal is to make debt more manageable and stay on top of monthly payments more easily. Debt consolidation doesn’t make the debt go away, it simplifies how you manage debt and helps you take better control of your financial future.
Pay off multiple debts with one personal loan
Say you have three credit cards at different rates of interest. You use all three cards and therefore have to make three repayments at different intervals every month. Moreover, the interest rate on one of your credit cards may be higher than the other two, so your monthly interest outflow may itself be quite high.
If you fall on hard times, then your credit cards will become a financial burden. Even if you’re in a steady job, managing three different credit card payments may make it difficult to budget, save and invest as efficiently as you would like.
You can consolidate debt by taking out a personal loan to pay off all your credit cards, including any outstanding interest. You have to worry about making only one repayment every month, fortnight, week or at a schedule comfortable to you.
Taking out a personal loan is just one option. There are better ways of consolidating your debt and monthly bills, as seen below.
Bring together multiple bills and credit cards
Transferring high-interest debt from multiple cards to a single card with a lower interest rate is a popular debt consolidation tactic. A number of balance transfer cards help you reduce your interest payment and come out of debt faster.
Some charge 0% p.a. on balance transfers and waive the annual card fee. Compare products to find the deal that works best for you.
If you’re making payments for your family members’ mobile phone plans, consider combining plans or getting on a family plan. Telecom companies offer plans that pool each family member’s mobile phone plan on one bill; this will work as long as everyone agrees to share data out of a data pool. As telcos also send you data usage alerts, you can monitor your expenses in an informed manner.
Some debt consolidation options may not go exactly as planned
Homeowners have the option of borrowing against the equity in their house. Consolidating your debt into a home equity loan is effective only if it relieves you of a large portion of your debt, or helps you save money by lowering your interest rates and costs.
You will still have to pay the regular fees associated with a loan. You’re also putting your home at risk. If this makes you uncomfortable, a home equity loan may not be for you.
Here’s something else to think about: consolidating your housing loan, car loan, personal loan, and credit card debt into your housing loan. Combining these debts could reduce your monthly repayments from $3,000 to $2,100, saving you $900 a month.
While this sounds like a great idea, consider these two factors: will you be taking out a loan with a term exceeding the life of the asset and/or are you likely to spend your monthly savings rather than use it to pay down more debt or use the money resourcefully?
Unless you’re confident that you will save money and curb your expenses religiously, there is no point in converting to a housing loan with a bigger balance and exposing yourself to future interest rate hikes.
Instead, you should try to limit your monthly expenses and bring all family members on board to figure out how to save more or find a way to earn extra every week to avoid missing your credit card or auto loan repayment, and ideally paying either or both off sooner.
Maybe focus on your credit card debt first and once that’s out of the way, use the money no longer being used to pay the credit card towards your personal loan. You can then speed up your car loan payments. Over the 4-5 years of your auto loan, you would have become a better money manager and at the end of this term, will only have to deal with your housing loan debt.
Some ideas on earning an extra income every month
- Have a garage sale and get rid of the stuff you don’t need anymore. Alternatively, you can offer to organise an auction for someone in exchange for a fee or a percentage of the profits.
- Get on Airbnb! Consider renting out a spare room in your home during peak vacation periods. If you camp out during the weekends (and assuming this doesn’t eat into your savings), you can also rent your home on the weekends.
- If you have paid out your car loan fully, you could rent your car through DriveMyCar or Car Next Door. Please find a company local to you and ask around before signing up with it. This strategy will only work if you don’t need to use your car every day to drop the kids off at school or for grocery trips. If you’re a singleton who uses public transportation often (it is cheaper!), you should actively consider this opportunity.
- You can, of course, ask for a raise at work or do something on the side (freelance) to increase your earnings. It also helps to find a mentor who can offer valuable tips on boosting your earning potential.
Finally, keep your eyes and ears open for financial advice from authoritative sources. You may chance upon an excellent opportunity that helps you consolidate your finances effectively.
Alternatives to loans
For many, the bank is the first place to take out a secured or unsecured loan. Reputed banks are a reliable source of external credit, offering a fixed interest rate and allowing you to make predictable monthly repayments. On the flipside, there is a lot of paperwork involved and wait times are longer too. Many may insist on collateral and you may even lock yourself into a very long-term loan.
If you’re in the marketplace for an unsecured loan or need urgent finances to meet an unexpected bill, a line of credit is the better option for the following reasons:
- You can borrow a specific amount and make monthly repayments on a line of credit over a predetermined time frame.
- Some credit lines offer the flexibility to make one-off payments if additional funds become available to you (think a salary bonus, you’re the beneficiary of a relative’s will or you get a good price on one of your vintage garage sale items).
- Once you open a line of credit, you can use it as when you encounter cash flow problems. You have the assurance of additional funds any time you need them in the future.
- The associated fees are less expensive compared to a loan.
- There is no charge for keeping the credit line open even if you don’t draw against it.
Low-income borrowers have low-interest options from microfinance organisations, backed by national banks. However, the loan amount is small (up to $3,000) and it can be used only for specific purposes, such as vocational training or medical expenses.
Centrelink also offers a line of credit to people receiving a part pension. The amount lent is the difference between the pension amount you receive and the maximum rate. However, this ‘loan’ is secured against your home/property, so it may not be feasible for everyone.
Regardless of which credit product you ultimately opt for, meeting your repayment obligations and maintaining a good credit rating will prevent debt from becoming a full-blown problem and help you access funds easily in the future.