Things You Didn't Realize Contributed To A Bad Credit Rating

Your credit rating can dictate every part of your future plans, from buying a house to paying for your next holiday. Here are the top things you may not realise affect your credit rating.

1. Having a high credit card limit

When applying for a loan, the lender looks at your credit card limit, not the amount you owe on your card. Even if you only use $1000 of a $50,000 limit, the lender will still treat you as though you regularly borrow $50,000. A smaller limit will help keep your credit rating higher.

2. Spending more than 50% of your credit limit

Your credit score is calculated against your debts using a debt-to-credit ratio or debt utilisation ratio. Rather than looking at how often you pay off your debts, credit raters also look at the amount of available credit you are currently using. If you’re using more than 10-30% of your available credit limit, your credit rating will likely be impacted.

3. Missing any repayments greater than just $150

Any overdue payment larger than $150, paid later than 60 days counts overdue, which is listed on your credit score for five years. Even small amounts matter. The Office of the Australian Information Commissioner (OAIC)’s report on your credit doesn’t reveal the amount on your missed payment; only that you missed the payment.

4. Transferring the balance of one credit card to another

This is an obvious one; but if you’re trying to escape fees on your credit card by moving the balance to a different bank, your rating will become lower.

5. Just applying for a credit card

Every time you apply for a line of credit including a credit card, your credit rating is impacted. Even if you don’t even go ahead with the credit card and you never even use it, just applying affects your rating.

5. Applying for multiple loans while waiting for one to be approved

‘Don’t put all your eggs in one basket,’ doesn’t apply when it comes to loans. Every time you apply for a loan, even if you don’t go ahead with it, your credit rating is reduced.

6. Being involved in insolvency, bankruptcy and court judgements

If you’ve been involved in any financial court judgements, as well as insolvency or bankruptcy, your credit score will be reduced.

7. Having a partner or spouse default on a loan

If you and your partner have joint bank accounts or a mortgage in both your names, you’ll want to ensure you submit your repayments correctly and on time. Even if your partner isn’t listed on the loan, their repayment history will influence your credit score.

8. Not letting your banks and other lenders know when you change your name

If you have a pristine credit history and change your name without letting lenders know, your credit history will be lost. A perfect credit history is one of the best ways to ensure an ongoing high credit rating.

9. Closing credit cards with a good repayment history

Use it or lose it to keep a good credit rating.

10. Missing just one payment out of many each month

The OAIC shows if you’ve missed just one payment in your monthly stack of bills, your credit history will still show you’ve not met your obligations for the entire month.

Don’t let small mistakes lower your credit rating. Stay on top of your obligations so when you need a loan, you can get it.

Loans After Bankruptcy – Be Prepared!

Though it is not impossible to obtain financing after a bankruptcy process, it is not an easy task. The reason is simple, bankruptcy ruins the applicant’s credit and it can take a lot of time to recover it. The lending industry is based on the concept of risk and those borrowers who have a past bankruptcy on record represent a very high risk for the lenders that have to consider their applications. Nevertheless, the lending industry has become so competitive that even those with a past financial failure can obtain a loan. But, they should expect certain restrictions and drawbacks:

Smaller Amounts

Rebuilding credit is a matter of time. Those with a past economic failure cannot expect to obtain high amounts easily. The only possibility for obtaining a high amount loan is to provide a proper and valuable asset as collateral for the loan. And even in that case, the borrower will have to cope with other drawbacks such as a higher interest rate and reduced repayment programs which imply higher income requirements.

Higher Interest Rate

The interest rate is a risk related variable and these two magnitudes are directly proportional. This means that the higher the risk implied in a transaction, the higher the interest rate that you will have to pay. Therefore, those with a financial failure on their credit report should expect to pay a significantly higher rate than those that have a clean and stainless credit history.

This does not mean that you will have to cope with exorbitant interest rates. It is possible to obtain an unsecured personal loan with a moderate interest rate even with a past bankruptcy. However, as explained above, the amount of money that you will be able to obtain will be reduced. Low interest rate and high amounts with such low credit is not feasible.

Additional Charges

Often, you will find yourself having to pay additional charges or costs for products that other people can obtain at reduced prices or even for free. For instance, credit cards with high credit limits may require you to pay an annual renovation cost while high credit applicants can obtain these products with no extra costs or charges and even obtain interesting reward programs.

Also, since you probably need to offer some sort of asset as collateral if you are applying for a loan, the closing costs on that loan will include the fees and charges usually associated with secured loans related to the assessment of the property used to guarantee the loan. As you can see, having bad credit due to a economic failure will imply overall higher costs that are unavoidable if you are in need of finance.

Course of Action

The reasonable thing to do is to avoid applying for finance during a reasonable amount of time till you can build up your finances again. Even if you take more time to recover without finance, your credit will eventually rebuild successfully and you will be able to obtain small loans and credit cards with reasonable rates that will help you further improve your credit situation.