If you are one of those individuals with a low credit score, do not fret. Sure, it may make it more challenging to get big loans, but it’s not a hole you can’t dig yourself out of.
For most of us, major purchases like a car or a house cannot usually be covered out of pocket. We have to take on big loans to be able to make these purchases, and one of the first things that creditors look at when we apply for a loan is our credit score.
Put simply, a credit score is a numerical indicator of how good a creditor we are. A high credit score means that we are known to make prompt payments for all our debts, and that means creditors are more likely to give us higher loans since they do not see us as much of a risk.
On the other hand, a low credit score means that creditors will be more hesitant to approve loan applications. If they do, the amount is usually low, and they have higher interest rates because the lender will feel like they need more security to ensure payment.
If you are one of those individuals with a low credit score, do not fret. Sure, it may make it more challenging to get big loans, but it’s not a hole you can’t dig yourself out of. Getting a low credit score took time, so building it back up will also take time.
How the Credit Score System Works
In Australia, credit bureaus are tasked with determining each person’s credit score, with the biggest bureau being Equifax. A credit score can range from anywhere between 0 and 1200.
A score of 0 – 509 means that your credit score is below average or “at risk.” A score of 510 – 621 represents an average credit. 622 – 725 is good credit, 726 – 832 is very good credit, and 833 – 1200 shows excellent credit.
As you can see, you generally want to be in the 622 – 1200 range, and you will want to avoid the 0 – 509 range as much as possible. Still, it might surprise you to know that there are a lot of people who have bad credit; around 13% of credit cardholders in Australia are already at risk of credit default.
Numerous factors go into play when determining one’s credit score.
- The amount of credit you have had – This looks into the type of loans you have made or applied for in the past and how much they were worth.
- The age of your credit – The longer you have been a creditor, the more reliable your account is generally seen. Younger credit accounts are seen as less reliable since there are fewer factors to look into.
- Your credit inquiries – Your credit account notes down all the credit applications you have ever made. The more applications you have in your history, the more likely it is that you will be seen as a high-risk borrower because you shop around.
- Credit type – Creditors will also look into what kind of credit you currently have, from housing loans to car loans to student loans.
- Personal information – Your age, employment status, and address all play a factor in your credit score.
- Defaults or failed payments – Every time you fail to pay your debts on time, these failures will reflect on your account. Too many defaults will have your account flagged as high risk, making it difficult for you to get a high score.
- Default judgments against you – When courts themselves issue a judgment rendering you in default, this will also bump your score down quite considerably.
A person’s credit score is determined by a myriad of factors that all come into play. As you can see, most if not all of them have something to do with showing the creditor how reliable of a borrower you are.
If your credit score currently shows you to be an unreliable or a risky borrower, there are ways to steadily make your score climb back up.
Reestablishing a High Credit Score
Pay off any credit lines you already have before applying for new ones
The more you keep making credit applications, the worse it will reflect on your credit score. Applying for more credit lines while still having active credit lines will make it look like you are shopping around for credit, and that is a big red flag for creditors. If you want to reestablish reliability, make sure to pay off any loans first before applying for new ones.
Do not make late bills payments
It is not enough to pay your bills; you have to pay them on time. This is something that you can start working on even with a low credit score. Once your account starts to reflect consistent bill payments made on time, your credit score will slowly rise as you begin showing your ability to pay promptly.
Late payments are reported as defaults 60 days after their due date. As we discussed above, having defaults on your credit account is one surefire way to bring your credit score down.
If you keep making late payments, not because of a lack of money, but because you just keep forgetting, it might be helpful for you to set automated reminders through your phone. You can also check if your bank allows automatic deductions from your account on set dates.
Start paying off any existing loans
There are two known ways to pay off multiple debts: the avalanche method and the snowball method. With the avalanche method, you make the minimum payment on all debts, then the remaining funds are used to pay off the highest interest debt. This allows you to prioritize debts by interest rate while ensuring that you do not default on any of your debts.
On the other hand, the snowball method also involves paying the minimum on all debts, but the remaining funds are used to pay off the smaller debts first. This way, you can reduce the number of your debts quicker, which can be useful for those finding it hard to keep track of plenty of debts.
There is no objectively superior method; each has its own benefits, and you will have to determine which of the two works better for you.
Regardless, paying off your debts will work wonders for your credit account. The sooner you can lessen your number of debts, the sooner you can start seeing your credit score rise.
Having a bad credit score can make some doors inaccessible for you, but that is not a permanent problem. Your score is affected by multiple factors, a lot of which you can start working on in order to improve your rating.
Sometimes, it can be as simple as focusing on the debts that you currently have and start making steady payments on them.
What is important to remember is that you did not get a low credit score overnight, so you also will not be getting a high credit score overnight. Do not be disheartened if you don’t start seeing high numbers instantly.
Just keep putting in the work, and eventually, you will be seeing yourself getting an average, if not a very good credit score. Good credit is all about good financial management, and it starts with good financial habits to get you going.