Bad credit negatively affects your life. It can make it harder to get approved for a loan, as lenders often question your ability to repay debts. Those that will lend you money may charge higher interest rates – so you end up paying back more over the life of the loan.
What’s bad credit and how does it wreak havoc on your credit file?
Bad credit is when you have a history of unpaid or late bills and debts. These are recorded as negative listings on your credit file alongside other financial information including:
- Debt balances
- Credit defaults
- Court judgments
- Late repayment history
- Details of any undischarged bankruptcies
- Previous credit applications
Together, this information forms your ‘credit score’. A credit score is a numerical representation of your risk profile. The lower your score, the trickier you’ll find it to get credit.
How bad credit damages your credit file
According to Experian Australia, your credit score can drop by 22% if you miss just one credit card repayment. Miss three or more repayments within three months and you’re looking at a massive 42% hit to your score.
However, there’s worse news. Depending on the negative listing, this damage can be long-lasting.
For example, If you fail to make a payment on a debt larger than $150 within 60 days of the due date, this is listed as a default on your file – and stays there for up to five years.
Having bad credit can affect you in several ways:
Loan and credit approvals
- Lenders are less likely to approve loan or credit applications from those with bad credit.
- If approved, you may face less favorable terms like higher interest rates and additional fees.
Employment and business opportunities
- Some employers may check credit reports as part of background screening, potentially impacting job opportunities.
- Bad credit can make it difficult to secure loans or financing to start or expand a business.
Higher costs
- Insurance companies and utility providers may charge higher rates or require security deposits for those with bad credit.
How to avoid bad credit
The best way to avoid the negative impacts of bad credit is by:
- Paying your debts and bills on time, every time
- Lower your credit card limit
- Not making too many credit applications in a short amount of time
- Speaking to your credit provider to negotiate your debt if you’re experiencing financial difficulties
It can also be a good idea to check your credit report regularly. This means that you can make sure all the information on there is accurate – as sometimes negative listings are placed on your file when they shouldn’t be.
It’s important to note that legitimate negative information cannot be removed from your credit file before its expiry date. However, taking steps to improve your financial habits can help rebuild your credit over time.
