We let you in on (almost) everything you need to know about how having bad credit can affect you, as well as how you may still be able to get a personal loan.
What is bad credit?
Firstly, it’s important to understand what ‘bad credit’ means and how a bad credit score is calculated. Bad credit is a term given to borrowers who have a low credit rating. Credit scores in Australia are compiled by credit reporting agencies like Equifax, Experian and Illion after assessing your credit history.
Each agency has its own scoring system, but the lower the score, generally the more of a credit risk you are perceived to be. In other words, the less confident a lender will likely be that you will make your loan repayments on time (or at all) and in accordance with the loan agreement.
Any score below 580 would generally be considered a bad credit score with each of the major credit reporting agencies in Australia. You can check your credit score for free with any of these agencies online. You should do this before applying for personal loans as too many enquiries on your credit report can make it even harder to get approved. For more information on this, read our article on What is an enquiry on my credit file?
How do you get a bad credit score?
The main ways you get a poor credit rating are:
1) Not paying all your debts on time or in accordance with the relevant credit contract.
2) Not paying your debts at all.
3) Making too many unsuccessful credit applications, especially in a short period of time.
4) Creditors taking legal action against you to recover debts.
5) Having a high level of debt.
Do lenders check your credit when you apply for a personal loan?
Yes, most lenders will.
1. Your application will be declined; or
2. Your application will be approved, but it may have stricter terms and conditions attached to compensate the lender for the increased risk.
The stricter terms and conditions could include any of the following:
- Higher interest rates.
- Higher fees.
- You being required to have a guarantor. A guarantor is a person who agrees to become legally liable for your personal loan if you don’t make your repayments.
- You being required to put up an asset as security for the loan. In finance jargon, this is known as collateral or security. If you don’t make your repayments on a secured personal loan, the lender may be able to legally seize and sell your security asset to repay the loan.
How to help improve your chances of getting a secured personal loan with bad creditThere are several strategies you can implement to help improve your chances of getting a personal loan with bad credit: 1. Take steps to help improve your credit rating. 2. Check if you own any assets that you can use as collateral for secured personal loans with bad credit. 3. Talk to a family member about becoming a guarantor for you. However, it’s important to understand that this is a serious legal commitment for both you and the guarantor. 4. Do up a personal budget of your income and expenses that includes a savings plan. Stick to that budget and savings plan for at least three months before you apply for a personal loan. This will hopefully demonstrate to a lender that you can afford your repayments and will show you whether or not you can keep on top of your desired loan amount, pursuant to a credit contract. 5. Talk to a lender who specialises in giving Aussies a second chance with finance (like Finance One!). Loans for bad credit often have different lending criteria. The lenders can help you understand what loan product for bad credit might be right for your circumstances and can hopefully help you get a fair go.
How can you improve your credit score if you have bad credit?
There are several things you can do to help improve your credit:
1. Repay all your overdue debts to help reduce your overall debt level.
2. Start making all your repayments on time and in line with your loan agreement. Australia recently introduced comprehensive credit reporting regulations that include positive financial reporting information on their customers’ credit histories, not just negative information.
3. Don’t apply for credit with multiple lenders.
4. Reduce the number of credit cards you have and consider reducing your credit limit on the cards you retain. Lenders will generally consider your credit limit as the amount of debt you’re in (or could potentially get in) when assessing your loan application. Reducing your number of credit cards and your credit limit on those may help with getting your application across the line. However, be aware that lowering your credit limit without paying the debt down may change your debt-to-limit ratio. Increasing this ratio can actually negatively impact your credit rating. For example, if your credit card balance is $10,000 and your credit limit is $20,000, your debt-to-limit ratio is 50%. This means you are utilising half of your available credit. If you reduce your credit limit (which may help with improving your chances of getting your loan approved) you increase your ratio. Let’s say you reduce your limit to $15,000. With a balance of $10,000, the debt-to-limit ratio is now 75%. You should consider speaking directly with your credit card provider for more information.