Ways to Repair & Protect Your Credit Score

As more and more Australians become aware of the detrimental impact bad credit can have on their lives, there is more interest in establishing good financial habits and repairing bad credit.

If you are among those who struggle with poor credit, rest assured things can improve for you.

How Do I Know if I Have Poor Credit?

Your creditworthiness (how much of a risk you are for a lender) generally hinges on your credit score. For most people, their credit score is a mysterious three- or four-digit number that appears to have no ties to reality. Hearing your score is 629 or 813 has little impact if you do not understand the credit bureau’s score scale.

This is the score breakdown from Australia’s largest credit bureau, Equifax:

• 0-509- Below Average Credit (also called high-risk credit)
• 510-621- Average Credit
• 622-725- Good Credit
• 726-832-Very Good Credit
• 833-1200- Excellent Credit

How is My Credit Score Calculated?

Calculating a credit score is a complicated process, and several factors influence your credit score.

Here are the points the credit bureau looks at to determine how much of a risk you are to lenders:

• The kind of credit you presently have – home loans, student loans, credit cards, car loans, and so on all have impacts on your score
• Who holds your loans – did you get your loan through a traditional bank or credit union, or did you finance via a non-traditional lender?
• How much credit you have – the size and type of your loans
• How old is your credit – loans that have been around for a while seem to be more stable than newer loans
• How many credit inquiries you have – having many credit inquiries reflects poorly on your credit score
• Your personal information – your age, where you live, and your employment status
• Any defaults – how many credit infringements or overdue payments are in your past
• Court Writs – any court writs of default judgements negatively impact your credit

Six Myths About Your Credit Score

It is easy to get misinformation about your credit score. Between irresponsible information online and your sister’s best friend’s uncle’s advice, you can end up perfectly confused.

Check out these six myths and see how many incorrect facts you have heard:

1. If You Have No Debt, You Have a Good Credit Score – Unfortunately, this is not true. A part of your credit score is about how reliably you repay your debts. Having no history to show you are creditworthy works against you.

2. Checking Your Credit Score Hurts Your Credit – The truth about this statement is somewhat mixed. There are two types of credit inquiries, and they impact your credit score differently.

• Hard Credit Inquiry – A hard credit inquiry happens when a lender accesses your credit history to determine your creditworthiness. This will impact your credit score
• Soft Credit Inquiry – A soft credit inquiry is when you or a designated representative ask for information about a credit score without the intent of applying for more credit

3. You Must Go Into Debt to Build Credit – This is more of a half-truth than a complete myth. You do need to show you can repay debts regularly. However, having a cellphone contract or a utility bill in your name is a safe way to prove creditworthiness without falling into heavy debt.

4. To Have a Good Credit Score, You Must Have a High Income – While having a steady work history plays a part in your credit score, the amount of money you earn does not predict how well you manage your money. A person with a modest income who makes good decisions and repays debts on time can have a superior credit score to a person who earns a great deal of money but is irresponsible with credit.

5. When You Get Married, Your Credit Scores Become One – Even though you and your spouse are together until death do you part, you each have an individual credit score. As you and your partner apply for joint credit for home or car loans, the shared debt will impact your credit score. However, your credit score is exactly that, yours.

6. If You Have a Bad Credit Score, You Will Never Be Able to Get Credit – Credit scores change over time. Remember, all is not lost. Between 2020-2021, there were 6,792 bankruptcies in Australia. Every one of those people can rebuild their credit scores. If you are proactive and make smart changes, you can build your credit score over time.

Bad credit is only one reason Australians do not get approved for credit.

• 36 per cent of Australians were denied credit because of an unsteady income
• 22 per cent of Australians were denied credit because they carried too much debt
• 21 per cent of Australians were denied credit because they had poor credit

Improving Your Score

While you will not repair your poor credit overnight, you can make meaningful changes to improve your credit over time.

Some actions that will help you in the long run include:

• Make Your Payments on Time – Paying your bills on time is one of the most important things you can do to improve your credit score. Late payments are reported as defaults and can significantly lower your credit score. Additionally, defaults are challenging to remove from credit reports.
• Do Not Apply for More Credit – Not only will these applications turn into hard credit inquiries, applying for more credit when you are already in debt raises red flags for lenders. This is because you appear to be a bad risk to lenders.
• Make A Plan to Pay Down Your Debts – Making strides to repay your debt looks good to lenders. Look over your debts and target the one that is easiest to manage. For example, you may have a line of credit to a department store with a relatively small balance. Make extra payments until this debt is gone. Then follow the same strategy until another debt is gone. Keep moving in this direction to show lenders that you are responsible with credit.
• Continue Your Plan to Pay Off Debts, but Do Not Close Accounts When You Have Paid Off Your Debts – It may seem counterintuitive, but closing a credit card account with no balance will not help your credit score. Lenders want evidence that you are a good risk with credit. One or more accounts that have no outstanding balance or defaults helps your credit immensely.
• Look for Ways to Lower Your Payments – Some credit cards offer better interest rates than others. You may find pooling your debts together can lower your interest rate and save you money

Preventing Future Problems

There are several ways you can prevent trouble with debt in the future. These include,

• Order your credit file and stay on top of what information is in your credit report. Be sure to look for any discrepancies, as you can dispute errors and have them removed from your credit report.
• Make bill paying a priority – Repaying your debts is crucial for maintaining a good credit score. Some people set up a bill-paying system using calendars or pocket notebooks to be sure the bills get paid. Others speak to lenders and set up automatic payments. Doing so makes sure nothing falls through the cracks or gets forgotten.
• Make financial wellness a priority by paying attention to your accounts and credit score.

If you are struggling with your credit score and would like input from a financial professional, consider contacting Quantum Finance. Our experienced and friendly staff are available to help you understand your situation and plan for the future.

*The material presented here is for informational use and should not replace a consultation with a financial professional. *