Protecting your credit rating

Your credit rating may not seem like a huge priority right now; however, it’s important not to let it slide by neglecting your financial commitments. Taking a few extra steps now to check in on where you stand could save you years of pain.

What is a credit rating?

When you approach a lender for a loan, they will check your credit rating (also called a credit score), which is a number that gives them an indication of your reliability as a borrower. Your credit rating is based on your credit history, which is a record of your financial information, including credit applications, current credit accounts (such as home loans, car loans and credit cards), credit defaults (overdue bills), past bankruptcies and so on.

Your credit score will be somewhere between zero and 1000 (or 1200 depending on your credit-rating agency) which relates to a five-point scale: below average, average, good, very good and excellent. The higher your score, the better your credit rating and the less risky you are considered to be as a borrower.

How does your credit rating affect your future finance options?

Your credit rating – along with your full credit file – tells the lender what kind of borrower you’re likely to be. Lenders rely heavily on your credit rating to determine how much they will lend you or if they will lend to you at all. Your credit rating affects all future forms of financing – from car loans to home loans and credit cards.

Each lender will assess your credit rating against their own internal criteria and all lenders have different risk tolerance and lending policies.

You can maintain a good credit rating by:

• paying all bills on time (big or small)
• ensuring outstanding debts are being regularly and routinely repaid
• not applying to a large number of lenders for loans or credit

Conversely, not paying bills and other debts on time, multiple loan application rejections and even outstanding bills in a company that you are a director of, can all be noted on your credit report.

If you don’t have a very good credit rating, you will have fewer lenders to choose from, less loan options and you may also have to pay higher interest rates. Some lenders will be open to hearing the rationale behind a bad credit history – and some won’t. Your Mortgage Choice broker can help you in this situation.

A particularly bad credit rating could mean you can’t get approval for a loan from any lender and will have to wait until your credit score improves – but a bad credit rating isn’t forever. Information regarding credit defaults, credit accounts and credit enquiries is only kept for five years. Clear-outs (when a creditor cannot contact you regarding an outstanding payment) and bankruptcy information are kept for seven years.

Can your credit rating be affected by a COVID-19-related loan deferral?

Anyone who is granted a deferral on loan repayments due to financial hardship caused by COVID-19 – including home loans, credit cards, car loans, personal loans or another credit product – will not have their credit rating affected by the deferral.

However, you need to have had your repayments up to date prior to the health crisis. If you were already behind in repayments before COVID-19, you won’t have the defaults reported to a credit rating agency – yet. Once your deferral period ends, however, your bank will determine how to report your repayment arrears. In other words, customers who are behind in their repayments as a result of circumstances that are not COVID-19 related may find their credit rating will be affected.

The important thing is to contact your lender before you miss any repayments and discuss your financial situation with them. If they agree to a repayment deferral, then you know your credit rating won’t be affected during this period.

Can your credit rating be affected if you can’t pay your bills? 

If you are having trouble paying your bills for essential services – such as electricity, gas, insurance (including health, car, home or life insurance) and phone or internet connection – you should also get in touch with your service provider to explain your situation before you default on your payments. Most service providers are willing to be flexible on payments for customers who are facing financial hardship due to COVID-19.

The amount of help you receive will depend on your service providers’ policies; however, you may be able to access a payment extension, a specialised payment plan, bill smoothing, a payment deferral or a payment freeze. But, despite the current health crisis, if you don’t pay your bills and you haven’t contacted your provider to make alternative arrangements, you can damage your credit rating.

How to check your credit rating

You can check your credit score or apply for a full credit report for free by visiting one of the online providers listed on the government’s Moneysmart website. It’s a good idea to do this once a year to check that it is correct. Some credit reporting agencies will allow you to join a subscription service to be notified if anything changes on your credit report. If there are any mistakes in your credit report, you should rectify them as soon as possible by contacting the credit reporting agency.

There are three main credit reporting agencies in Australia – Equifax, CheckYourCredit (illion) and Experian. Lenders vary as to who they use to assess your loan application and you may also have a credit report with more than one agency, so it’s important to keep track of your record with each agency.

How to improve your credit score

You can gradually improve your credit rating by keeping on top of your finances. Here are a few ways to improve your credit rating:

1. Settle any outstanding debts.
2. Check to see if a credit repair service can remove any negative listings.
3. Guard against accidental future credit defaults, such as bill payments, credit card and loan repayments by setting up a direct debit. For one-off bills, make a rule to pay them as soon as you receive them so they don’t get forgotten.
4. Reduce your credit limit on your credit card.
5. Don’t take out any new loans or credit cards.
6. When you access your credit report, add a consumer statement to your report that outlines the circumstances of any credit problems. Some lenders may be more compassionate if there was a good reason for the default.
7. Lenders like loyalty and reliability. If you move house, jobs and banks frequently, this doesn’t paint a picture of someone who is loyal and reliable, so avoid doing this where possible.

Looking after your credit rating is essential if you are likely to want to borrow money or even apply for a credit card in the future. It can take a long time to repair a bad credit rating, so make sure you keep on top of yours, even – or especially – during COVID-19. Your Mortgage Choice broker can help you understand further how credit ratings work so that you can work towards a good credit rating.