Today, many Australians are struggling to improve their credit. In fact, of the 16 million Australians with credit cards, 13% of those individuals are at risk of credit default. However, a low credit score doesn’t mean you can’t reclaim your financial wellness. While it’s true that having a lower credit score will make it more challenging to buy a home or get a loan, there are many steps you can take to boost your credit score.
Credit building takes time. You won’t find an overnight strategy to overhaul your credit rating in a matter of hours or days, but you can take smaller steps that lead to big improvements. Is your credit lower than you’d like? Don’t settle for getting rejected for credit and loans. It’s time for a change.
The reality is that bad credit isn’t a death sentence. It’s a hole you can easily dig yourself out of with some discipline and hard work. It’s also important to remember you aren’t in this alone. If you’re struggling to repair your credit, reach out to a financial expert with experience in rebuilding credit scores.
Debt doesn’t have to take over your life. Are you ready to make a positive change? Keep reading for a comprehensive guide to improving your credit score.
How Credit Works
First, let’s talk about how credit scores work in this day and age. Your credit score is a summary of your financial history. It’s how lenders decide if you’re a safe investment or a risk. The largest credit bureau in Australia is Equifax, formerly known as Veda. Your score can be anything between 0 and 1200.
Score Breakdown
- 0 – 509: Below average or at-risk credit
- 510 – 621: Average credit
- 622 – 725: Good credit
- 726 – 832: Very good credit
- 833 – 1200: Excellent credit
So, how exactly is a credit score calculated? This score is created using a number of factors to determine how well you’ll be able to repay any lines of credit. These factors include all of the following:
- Type of credit – What type of credit do you currently have? Home loans, student loans, personal loans, car loans, etc. This also depends on the kind of lender your credit is through, such as non-traditional vs. a bank or credit union.
- The size of your credit – What is the type and size of your loan(s)?
- The number of credit inquiries – Any time you apply for credit, this is noted on your account. If you’re shopping around for credit, this appears as a red flag that you might be a higher risk to lenders.
- The age of credit – The date your file was created also holds weight. Older files are seen to be more reliable, while newer files have less credit history to assess.
- Your personal information – This includes your age, employment, and where you live.
- Your defaults – If you have any overdue debts or credit infringements, these reflect poorly on your score.
- Any court writs – Finally, any court writs of default judgments show you’re a higher risk and negatively impact your score.
As you can see, your credit score is a complex number. It’s a sum of many moving parts, and that’s why it’s not as hard as you think to improve your score. With the right effort, you can recover from any negative marks in the past.
Improving Your Credit Score
Now that you understand how your credit score is calculated by a credit reporting agency, it’s time to discuss real-life ways to improve your score. Having a healthy credit score opens you up to more financial flexibility. Because you understand the different aspects of your score, you’re empowered to put that knowledge into practice with these steps below.
1. Stop applying for new credit.
As we saw above, every time you apply for new credit, there’s an inquiry on your report. Even if your credit is approved, this inquiry is still there. Lenders view these inquiries as questionable if you’re already facing a lower credit rating.
When you’re still in the process of paying off other lines of credit, it’s a bad idea to apply for any more. Not only do you want to stop the inquiries from marking your account, but you also don’t want to seem like a greater risk to lenders. Credit applications can quickly pile up, making it harder to improve your credit score.
2. Pay your bills on time.
Another big step is also the simplest. It seems obvious to always pay bills on time, but few recognize the significance of even a small mistake with a late payment. Having a record of consistent payments has a positive impact on your credit score. This is even more important for larger payments of $150 or more.
If you do miss a payment, it will be reported as a default if it reaches 60 days overdue. Defaults are one of the worst things you can have listed on your credit report. They’re hard to get off, so they’re better to avoid at all costs.
Set alarms or configure auto-payments so you never accidentally forget to pay a bill. If you find yourself unable to pay on time, contact your credit provider to see if they offer payment flexibility. Most providers are willing to work with you as long as you’ve had a good record in the past.
3. Pay down your loans and debts.
Stress over existing loans and debts sometimes makes it hard to take action. It’s easy to fall into a cycle of loans and more debt, but recognize this as the harmful behavior it is. You can start paying down your loans and debts today if you make a few key changes.
Start with the loan or credit card that’s the easiest to manage. Maybe you’re only a few months from paying off this line of credit. Start there, and make larger payments until you’ve defeated this debt altogether. From there, use this momentum to push forward with paying off your other debts. It’s also important to make sure you don’t go over your credit card limit, as that can lead to extra fees and hurt your credit score.
As you pay down your debts, also focus on making consistent loan repayments. The more you’re able to pay off, the better this looks to lenders. You want your debt-to-income ratio as low as possible, so take this step seriously. Look for ways to increase your loan repayment funds every month, like budgeting, looking for free activities, and saving on utilities.
4. Lower your credit card balance.
Having a lower balance every month on your credit cards is always better than a high one. As we said above, look for ways to cut your current expenses, so you’re able to put more funds towards your credit card repayments and other existing lines of credit.
When repaying your credit card balance, start with the card that has the highest interest rates. These are the ones costing you the most overtime, so it’s vital that you tackle them first.
It might make financial sense to transfer your balance to a card with a lower interest rate. For example, many cards offer a 0% interest for an intro period, and this helps you get ahead on your payments. Look into debt consolidation options in your area to see if they’re right for your payoff strategy. The lower your card balance, the less stress you’ll have about your credit score.
5. Don’t close your accounts.
A lot of people make the mistake of closing any credit accounts they pay off. While this might be a smart move if you’re working under a financial advisor, it’s best to keep your accounts open as a way to improve your credit rating.
When an account is maintained without any negative reports, this reflects highly on your credit. Having no missed payments and a low debt ratio is part of having a healthy financial strategy.
Some individuals do the majority of their daily spending on credit cards and immediately pay it off. This is a healthy way to keep from incurring any excessive debt that you can’t pay. It shows you’re able to use credit responsibly. However, if you think this might be too tempting, consider not using your credit cards besides small payments to keep them active.
Maintaining Quality Credit
These are the best ways to naturally boost your credit score. Unfortunately, these aren’t quick fixes. They will take time and effort. However, with a mindset shift and a focus on healthy financial habits, a positive change is not only possible but easy.
Once you’ve raised your credit score to safer limits, it’s time to maintain this score. Achieving and maintaining a good credit score is crucial for your financial well-being. These positive habits need to become a new reality if you want to keep your credit rating high for years to come.
Healthy Credit Habits
- Always pay your bills on time, or work with your provider for a repayment plan.
- Avoid spending money you don’t have.
- Create an emergency fund to stop relying on credit cards for unexpected payments.
- Always review the terms and conditions before signing up for a loan or new line of credit.
- Don’t apply for credit too often.
If you make all of these changes above, your wallet will be happier and healthier. Together, we can make a positive change in your financial future. Don’t let poor credit get in the way of living the life you want.
You don’t have to navigate credit challenges alone. Debt Busters has helped thousands of Australians find personalised solutions to debt and credit problems. Get started with a free, no-obligation chat today.
FAQ
How can I check my credit score for free?
You can easily check your credit score by getting a free credit report from any of the main credit reporting bodies in Australia. The report will show you your current score and let you know if any negative information is affecting it. It’s a simple and helpful first step to understanding where you stand financially!
How can I improve my credit score after a default?
Recovering from a default can take a bit of time, but it’s definitely possible. Start by paying your bills on time and working on reducing your debt. You might also want to reach out to your relevant credit provider to see if they can offer a payment plan or financial hardship arrangement to help you get back on track. Over time, the impact of the default will lessen, especially if you stick to good credit habits!
Can utility bills affect my credit score?
Utility bills like electricity or phone bills usually don’t show up on your credit file unless they’re left unpaid for a long time. But if these bills go unpaid and end up in default, they can be reported to the credit bureaus and could affect your score. To keep things smooth, just regularly pay your bills on time to avoid any negative impacts on your credit.
How do credit limits affect my credit score?
Your credit limits actually have a pretty big impact on your credit score. Having a higher limit on your credit card can work in your favor, but only if you’re not maxing it out. Using too much of your available credit can drag your score down. The goal is to keep your balance low compared to your limit. It not only helps your score, but it also keeps credit stress to a minimum. Nobody wants to feel weighed down by debt!