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How fast can you fix a credit score, and how do you do it?

How fast can you fix a credit score, and how do you do it?

Having bad credit may make applying for loans and credit cards feel impossible. But it is possible to recover from a bad credit score, though the length of time it will take may vary. Checking your credit report is often a good start, as is demonstrating your financial responsibility.

How did I get a bad credit score?

There are many reasons why you may have a less than perfect credit score. Perhaps you had money troubles in the past, made a simple mistake, or were a victim of fraud or identity theft. Sometimes simple bad money habits can negatively affect your credit score, like frequently letting your household bills go overdue.

Banks and other financial institutions report negative credit events to credit reporting bureaus, where they are recorded in your credit history. This credit file is then used to create your credit score, which credit providers use to quickly get an idea of whether you’re a reliable and responsible borrower when you apply for credit.

How long do negative credit events stay on my credit file? 

Negative credit events don’t stay on your credit file forever. In time they will expire as new information is added to your credit history and your credit score is recalculated.

Generally, the more severe the negative credit event, the longer it will stay on your credit file.

Repayment history – 2 years 

If you’ve let your loan or credit card payments run more than 14 days overdue, this will be recorded in your credit file as a late payment. While one late payment is unlikely to meaningfully affect your credit score, a consistent pattern of late payments could indicate trouble managing money, bringing your credit score down.

Credit enquiries and applications – 5 years

If you’ve had an application for credit rejected, that will be recorded as a negative even in your credit file, potentially bringing down your credit score. Multiple credit applications over a short period of time can also indicate to lenders that you may be a risky borrower. As a broad guideline, more than five credit application in a year could be seen as risky.

Writs, summons and court judgements – 5 years

If a lender has gotten the law involved regarding a loan or credit agreement, this will stay on your credit file for five years.

Payment defaults – 5 years

If a payment of $150 or more is overdue by more than 60 days, a default may be recorded in your credit file, which can seriously affect your credit score. Even if the overdue accounts are later paid off, the defaults will remain on record.

Bankruptcies, debt agreements and personal insolvency agreements – 7 years

If you’ve had to go into bankruptcy or make similar arrangements after experiencing financial difficulties, this will stay in your credit history for seven years, affecting your credit score.

How can you fix a bad credit score?

Ordering a copy of your credit report can let you review some of the information that goes into calculating your credit score. Knowing what’s in your credit history can give you a better idea of how you can set about fixing your own bad credit.

Sometimes mistakes and inaccuracies end up on your credit report. Maybe credit information for a family member or someone with a similar name was accidentally added to your credit file. Or maybe you’re the unfortunate victim of fraud or identity theft, where someone has applied for credit and/or run up debts in your name.

If you have bad credit due to mistakes on your credit file, contact the parties involved about getting the information corrected and setting the record straight. Once your credit file has been updated with the correct information, you can expect to see an improvement in your credit score.

Thanks to Comprehensive Credit Reporting (CCR) it may be possible to improve a bad credit score by consistently practicing positive credit behaviours to counteract some of the negative credit events. If you can steadily pay your bills on time (such as by organising direct debits), pay off outstanding loans and cancel credit cards you don’t need, you may be able to slowly improve your credit score over time.

Finally, there’s time itself. It may take five to seven years, but eventually even defaults and bankruptcies will come off your credit file, and cease affecting your credit score. If you can keep a relatively clean credit record until then, you can usually expect to see an improvement.

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Fact Checked -

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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Learn more about credit score

Does a credit score check impact your credit score?

You may have heard that when a bank or lender performs a credit check, that it can impact credit score. But checking your own credit score isn't the same, and won't affect your credit score in the same way.

There are two types of credit checks that can be recorded in your credit history: hard credit checks and soft credit checks.

Hard credit checks occur when you apply to borrow money from a bank or lender, such as when you apply for a credit card or loan. A soft credit checks occur when your credit file is accessed outside of applications to borrow money, such as when you check your own credit score or credit history.

Checking your credit score is a request for information and not an application to borrow money, so it should not affect a lender’s decision to accept or decline your credit applications. As such, it's a soft credit check, and is unlikely to affect your credit score, positively or negatively.

 

What are some advantages of a good credit score?

You should know about the advantages of credit score improvement as there are many occasions when having a good score is helpful. If your credit score is categorised as good, very good, or excellent, it can indicate you have strong borrowing power. This may encourage lenders to give you special discounts on interest rates and other loan terms. You may also find it easier to get approved for a credit card or a property rental. You can also try to negotiate terms using your superior credit score as leverage.

A high credit score indicates that you are financially responsible, but it requires you to be disciplined. If you currently have a good credit score, you still need to remember not to apply too often for credit cards or loans as these can quickly pull down your score. On the one hand, you may have better access to credit, but your good financial habits mean that you may not need to access this credit. Having some credit products can help build up your credit report, and therefore your credit score. You would just need to keep the debt and limits to a minimum and pay the bills on time. It’s never advisable to take out credit that you can’t afford to pay as it negatively impacts your credit history.  Even if you have a good credit score, you can always improve it further.

Why should I check my credit score annually?

You may not need to get your free credit rating every year, but it can help you stay informed. A yearly free credit report can help Australians keep track of the impact of various financial transactions on their credit score.

Your credit score helps inform financial organisations, particularly lenders, about the sort of payer you are. Depending on how you've paid down debt in the past, it will have affected your credit score in various ways. In Australia, the inclusion of Comprehensive Credit Reporting (CCR) means that you can find out which transactions affect your credit score positively, as well those that have a negative impact.

Because of this, you may want to consider getting a free credit report once a year irrespective of whether you’re planning to apply for a loan or take on other debt. Checking your credit report can tell you if there are errors in your credit file, which affect your credit score and need to be corrected.

How regularly does your credit score change?

There are plenty of things that can affect your credit score, but when they'll impact it can vary wildly, and often depend on when the information has been passed on.

Every credit enquiry is noted on your credit file, and this impacts your credit score. Thanks to Comprehensive Credit Reporting (CCR), it means you both positive and negative transactions can impact your score, but so, too, can the frequency. For instance, if you apply too often for credit cards or apply with multiple lenders for a home loan and aren't successful, you may see a decline. 

How long this information take to pass on is an important question, but the length of time often depends on the credit reporting agency. Some transactions can take a small amount of time, while others take much longer. For that reason, it's important to check your credit history regularly so you can be more aware of what your credit score looks like, and if you need to correct any of the statements made on it. 

Does borrowing money affect credit score?

Whether it’s through a home loan, a personal loan, or a credit card, borrowing money will affect your credit score. Taking on a home loan or a credit card may have a positive impact on your score, but too many loan applications can bring your credit score down.  

Every time you apply for credit, an inquiry is performed against your name. Too many inquiries can reflect negatively on your credit report, and if your loan application is rejected it will negatively impact your credit score.

How you handle your debt can also make a big difference. As long as you make timely payments you may be able to improve your credit score and overall creditworthiness. However, any missed or delayed payments will likely result in a negative impact on your credit score.

Where can I check my credit report for free?

While you can get a free credit report in multiple ways, RateCity's own credit checking system allows you to find your score from two credit history systems, Experian and Equifax. 

When you request your free credit report, you'll likely need to supply some personal information, such as your name, contact details, and a personal identification, such as a drivers license number or another form of identification. 

Not only does a credit report show credit score, but it usually often contains positive and negative credit transactions covering the past five years of payments. 

What if your credit score has dropped for no reason

The importance of checking your credit score regularly is hard to overstate as the changes may not be as relevant to your life, and there may be the occasional error, but what should you do if it drops for no reason?

Credit reporting agencies calculate your credit score based on the information they receive from lenders, banks, credit card providers and utility companies, among others. This report takes into account both the credit enquiries these companies make, as well as your payment history with them, and may include other factors. But because some reports may come in at different times, delays can appear like drops. 

Suppose you missed paying a bill while on holidays and the supplier couldn’t reach you, or something like it -- in this instance, the provider may report the default to the credit reporting agency, which can cause your credit score to fall when the credit reporting agency eventually sees the information. Because of an obvious delay, the drop can seem random.

Regularly checking your credit score and the transactions that have appeared can provide some understanding as to why a credit score drop might have occurred, and even provide some understanding as to how you can fix the drop, improving your credit score in the process. 

Do landlords check credit scores?

For landlords, credit score checks can tell if a potential tenant has a history of delayed or missed rent payments. Usually, a poor record of repayments is likely to result in a low credit score. Also, your credit history may include information from tenancy databases such as the number of times landlords have inquired about your credit score. 

If there are too many inquiries within a short time, landlords may conclude that you have had issues renting in the past.  However, there is no rule as to when landlords check your credit score. Some might check every time they receive a tenant’s application. In some cases, landlords may even rent out their property to tenants with a poor credit history if they can submit additional documents or sufficiently explain their situation and how they are trying to address it.

 What credit score do landlords look for?

Landlords may look for issues relating to repayment rather than a specific credit score, although a low credit score probably suggests that you’ve had repayment issues. In general, if your credit score is categorised good, very good, or excellent - which corresponds to an Equifax credit score range of 622 - 1,200, landlords may not scrutinise your credit history too closely.

How does my credit score affect the interest rate offered by lenders?

When you apply for a loan, lenders will typically access your credit history. By studying your credit report, they can not only estimate whether you are a reliable borrower, but also calculate the maximum amount you can borrow and repay completely before the loan term expires. Your credit report can also tell lenders about the other kinds of debt you’ve taken and whether you earn enough to make additional repayments. 

If you don’t have too much outstanding debt, or if you’re managing your current level of debt well, you’re more likely to have a higher credit score. For some credit products, lenders usually offer a lower interest rate for applicants with a fair credit score. If they don’t, you can always try to negotiate it, given your higher creditworthiness. You should remember that asking for a lower interest rate may not affect your credit score, but applying for the loan certainly has an impact.  

What is a good credit score?

Across Australia's major credit score providers, Experian and Equifax, there are five tiers, ranging from "below average" to "fair" to "good", "very good", and "excellent", with your score designating where you sit. As the tiers suggest, an Experian credit score between 625 and 699, and an Equifax credit score between 622 and 725, is technically considered to be in the range of "good". Anything above this is even better.

However, lenders will typically favour the borrowers with the highest credit scores which means that applicants with a "good" credit score may not be offered an interest rate as competitive as one offered to a borrower with a "very good" or “excellent” credit score.

Can I check my credit score without a driver's license?

In Australia, your driver’s license is the preferred identification document for credit reporting agencies. This means you may not be able to confirm your identity using another document, such as a proof-of-age card. You may have genuine reasons like concerns over identity theft for not wanting to provide your driver’s license number. Unfortunately, most credit bureaus won’t allow people to check their credit score without a driver’s license. 

If you don’t have a driver’s license, there’s a good chance you haven’t applied for credit in the past and don’t have a credit score at all. In case you are concerned about identity theft, credit reporting agencies can offer you paid packages that include insurance against identity theft. Such packages may also include monthly credit score checks or alerts whenever your score is updated.

Why your credit score may differ between Experian and Equifax

Two of Australia's biggest credit reporting bureaus are Experian and Equifax, and while they both do the same thing, it’s not uncommon to find that your credit score can differ significantly.

Firstly, Experian and Equifax each have their own credit reporting algorithms to interpret and quantify your personal credit history. That means that while they do the same sort of thing -- credit tracking and reporting -- they may not handle it in the same way. Your credit history may therefore be similar, but not identical between Experian and Equifax.

While neither reveals exactly how they work, each also likely work in different time frames, which means your credit history may be viewed differently between the two. One could look at the most recent, while another might be weeks apart. For this reason, scores can vary.

Finally, there are different scales at which they work, and depending on the types of transactions your credit history has seen, this may impact the overall result slightly different, thus making the scores different. 

Do you need a credit score to rent a property?

A credit score is used by banks and lenders to understand your financial health and wellbeing, but you may not be aware that it's used as a way for landlords to understand whether or not it's risky to get into a financial relationship with you.

When you’re looking to rent a property, your landlord may check your credit history to get a sense of your capability to pay rent in a timely fashion. Landlors may look at your history of repaying debts, and this as a benchmark to understand the likelihood of you paying your rent on time, or not.

 

Can a bad credit score affect rental applications?

A landlord may check your credit score to work out how trustworthy you are, and whether you'll pay your rental obligations on time. So, can a bad credit score cause you to miss out on renting property?

When looking at your credit score for rental applications, landlords may not see a low score as a reason to instantly reject applications. Some may be more generous, and could be willing to consider a tenant with a lower credit score, or even request some form of additional deposit to act as security against possible future problems.

Alternatively, you may want to consider asking a guarantor to co-sign your lease, which gives the landlord peace of mind as they have an alternate payment source if you cannot make payment.