How to fix credit problems

How to fix credit problems

Credit problems – who has them? If you’re reading this article, chances are you have, or you know someone who has.

First off, know that you are not alone. A lot of people have issues with their credit from time to time. Australians are in more debt than ever before and our income-to-debt ratio is through the roof. If something happens to shake someone’s financial foundations, like a job loss or a health issue or a family emergency, most people will end up being in the red and facing credit problems.

So, you’ve got them, now what? It’s important to know why it is bad to have credit problems. Rarely do we act on getting something fixed up until we really understand how it would benefit us. Know this: credit problems will 100 per cent stop you in your tracks when you’re wanting to move forward financially and otherwise.

Whether you’re wanting to get a mobile account, a personal loan for a holiday you’ve been dreaming of taking, a car loan because your car is about to implode or a home loan because you’ve found your dream home, your credit problems will stop you.

Here’s what will happen. You’ll decide that you want to do something like getting a credit card, so you can improve your credit rating. You’ll apply online, go into a bank or call the customer service line of the bank you most want to use. They’ll knock you back without question and without any reason why, or they’ll knock you back and let you know it’s because of an issue on your credit file.

At this point it may be tempting to go to the next bank or financial institution and ask them if you can get finance. We strongly urge you to not do this. As soon as you get knocked back – no matter whether you think you’ve got credit problems or not – stop applying for finance then and there.

One credit problem that is growing in Australia is people appearing to be ‘shopping around’ for finance by going from company to company. While this may seem logical because you want what you want, it’s the opposite of logical if you want to get finance in the foreseeable future.

Each time you apply for finance, a credit enquiry will appear on your credit file indicating that you asked a particular credit organisation for money. Sometimes it says how much you asked for; sometimes it says $0. No matter what, it changes your credit file and reduces your score every time you go for finance, whether you get it or not.

More than five enquiries in a year speaks volumes to any other credit providers who access your credit file – and the messages are not necessarily positive.

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Three things to do when you discover you have credit problems

One of the first ways to fix your credit problems is to stop applying for any type of finance. Wait for six to 12 months and then proceed. The longer the period of time away from your most recent enquiry, the better and the more favourable your score will be. Also, the more attractive you’ll be to future lenders.

OK, so you’ve heeded our warning and stopped applying for finance. Good! The next step is to access all available copies of your credit file. We’re talking Equifax, Dun & Bradstreet and possibly even Experian.

Experian is a newer company in the credit reporting industry in Australia, so it does not have as much data as Equifax and Dun & Bradstreet. However, to understand your comprehensive credit record, Experian is absolutely a piece of the puzzle. These credit files can be accessed for free (this service typically takes up to 10 business days, although sometimes it takes much longer) or via paid services. Also, typically credit repair companies can access these for you for a fee and will give you a credit towards their services if you decide to move forward to repair any defects on your reports.

Once you have your credit reports, it’s time to assess them. A credit repair company can do this for you and will usually do a free assessment of your situation or you can look at it yourself. Other options are to talk to the relevant credit reporting company about it, or speak to a finance professional that you are not trying to get finance from.

What you will notice when you get your credit files is that they are rarely the same. For example, your Equifax file may have the same and different information on it to your Dun & Bradstreet credit file, and your credit scores for each file will be different.

We assessed a client’s files this week and she had seven recent enquiries (made between 3 December 2017 and 8 February 2018) on her Equifax credit file and a score of 342, and three of the same enquiries on her Dun & Bradstreet credit file and a score of 626.

Why the difference? Some companies only check one credit file and some companies check all credit files when you apply for credit, so it’s important to know the whole picture before you apply for more credit. Both credit scores will need to be over 650 to be sure of being approved, as you never know whether they will check both files and find that one has a low credit score.

Credit problems typically fall into several categories:

  • Credit enquiries
  • Default listings (both commercial and consumer)
  • Court judgments
  • Bankruptcies
  • Part 9 debt agreements
  • Writs
  • Summons

When checking the credit file, keep a lookout for default listings, judgments and credit enquiries. Ask yourself the following questions:

  1. Did I enquire for finance or credit or any type of account with this company (for credit enquiries)?
  2. Did I know and agree to the company mentioned accessing my credit report (for credit enquiries)?
  3. Did I have an account with this company (for defaults and judgments)?
  4. What is my recollection of the issues that I was having making payments towards this account? What was happening in my life in the six months leading up to the date listed as the ‘default/judgment date’?

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Repairing your credit history

Once you have the answers to these questions you can start working to repair your credit history and clear your name.

One thing to note is that the majority of what is on your credit files will come off it automatically in five to seven years from the date of the listing. So one way to fix your credit file is to wait it out and make sure nothing else gets on there. During this time, it is very important to not apply for any types of accounts as this will lead to further complications in the future.

The downside of this approach is that you may be locked out of the housing market, and you can’t replace your car or get a new mobile until your files are clear.

There are many things that you can do yourself and there are many things that credit repair companies can do on your behalf. People will often choose credit repair companies because they have knowledge of the legislation and rules, and they dedicate their time to fixing these types of issues every day and push the companies to resolve things as quickly as possible.

Here are four things you can do yourself to repair your credit history:

1. Contact the company

You can contact the company in question asking for your default listing or judgment to be removed from your credit file. You can also ask for an investigation into its accuracy. The company may or may not agree to the removal of the default listing, but they do have to agree to an investigation. The seriousness of the investigation is another question to consider, as many companies will do a surface-level investigation to pacify the customer.

2. Contact the ombudsman

Next you can contact the relevant industry ombudsman and ask them to do an investigation on your behalf. You will need to be very engaged in this process as the ombudsman will have questions for you that need to be answered within a period of time. Also, you will have to be able to put a solid case forward as to why your credit history is wrong and why it is the fault of the company in question.

Everyone that provides Australian consumers with credit or finance must be a part of an industry ombudsman. As a side note, organisations that provide commercial finance do not have to be a member of an ombudsman. Also, companies that list judgments do not necessarily need to be a member of an ombudsman, so this step does not work for every type of default or judgment listing on your credit file.

The various ombudsmen have delays up to 20 weeks in looking at cases. You typically only get one chance to appeal to the ombudsman to have a consumer default listing resolved. So it’s very important that your first attempt is carried through to completion and you don’t miss a beat in terms of your arguments and answering questions.

3. Contact the Privacy Commissioner

If the organisation is not a member of an ombudsman, then you can take your complaint to the Privacy Commissioner. The Privacy Commissioner only looks at complaints about consumer, not commercial, credit files. Like the ombudsman, they will help you make a complaint against the company that listed you and will hold the company in question accountable for their actions. The Privacy Commissioner tends to take 12-16 weeks to deal with cases.

4. Contact the credit reporting company

You can also contact the credit reporting company and ask them to do an investigation into the validity of the default listing. Typically, they respond within 30-45 days, and give you the outcome of their investigation into the validity of the listing.

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Final thoughts about fixing credit problems

That should give you enough to get started with. Remember, getting your credit problems fixed ASAP will set you up for a life of financial freedom, it will ensure you’re taken care of and do not get knocked back when you apply for credit or a loan down the track.

So, here’s the quick credit problem check list:

  1. If you get your credit application rejected, immediately stop applying for any and every type of credit contract.
  2. Get to the bottom of your credit history by getting your Equifax, Experian and Dun & Bradstreet free credit files.
  3. Get these properly assessed so you know what’s holding you back.
  4. Get all defaults, judgments, court actions and credit enquiries investigated to ensure they are valid before you apply for finance again. If you want this done by a professional who knows all the rules, contact a credit repair company to run the cases for you.
  5. Otherwise, wait until the issues naturally drop off your credit files after five to seven years.

Good luck and keep your credit files clear for your future self!

Dr Merrilyn Mansfield is the lead adjudicator and researcher for Princeville Credit Advocates. She is fascinated with the consumer laws that relate to credit reporting and in advocating for a consumer’s right to a correct credit report. She is in her final year of law. For more information email merri.m@princeville.com.au or call 1300 93 63 63.

Carmel Mansfield is a credit file specialist at Princeville Credit Advocates, currently working with clients to improve their credit score. She has also worked in complex case management at Princeville since 2010. She holds an economics degree from the University of Sydney and is a passionate consumer advocate.

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Learn more about home loans

What is a credit file?

A comprehensive summary of your credit history from an authorised credit reporting agency.

It includes your credit details, credit taken in the last five years, any default payments or credit infringements, arrears, repayment history, bankruptcy filings and a list of credit applications (including unapproved credit applications) in addition to your personal details.

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

How does a line of credit work?

A line of credit functions in a similar way to a credit card. You have a pre-approved borrowing limit and can draw on as little or as much of that sum as you need it, with interest paid on the outstanding balance.

Popular products include Commonwealth Bank Viridian Line of Credit, ANZ Equity Manager, Westpac Equity Access and NAB Flexiplus.

How can I qualify for a joint home loan if my partner has bad credit?

As a couple, it's entirely possible that the credit scores of you and your partner could affect your financial future, especially if you apply for a joint home loan. When applying for a joint home loan, if one has bad credit, there may be steps that can help you to qualify even with bad credit, including:

  • Saving for a higher deposit, ideally 20 per cent or more. Keep in mind:  a borrowed amount of less than 80 per cent of the property value also saves the cost of Lender's Mortgage Insurance (LMI).
  • Consistent employment records, regular savings habits, and an economical lifestyle can help prove financial stability and responsibility. These can improve your chances of approval even if there are some negative marks on a credit report.
  • Delaying your decision to buy a property until your partner’s credit score improves. Alternatively, you may want to consider a solo application.

While these tips may assist, if you find this overwhelming, consider consulting an expert advisor who can offer personal guidance based on your financial situation.

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

Can I get a home renovation loan with bad credit?

If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan. 

Before taking out a new loan, it’s good to note that lenders are likely to charge higher interest rates on home repair loans for bad credit customers. Alternatively, they may be willing to lend you a smaller amount than a standard loan. You may also face some challenges with getting your home renovation loan application approved. If you do run into trouble, you can speak to your lender and ask whether they would be willing to approve your application if you have a guarantor or co-signer. You should also explain the reasons behind your bad credit rating and the steps that you’re taking to improve it. 

Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.

Do mortgage brokers need a consumer credit license?

In Australia, mortgage brokers are defined by law as being credit service or assistance providers, meaning that they help borrowers connect with lenders. Mortgage brokers may not always need a consumer credit license however if they’re operating solo they will need an Australian Credit License (ACL). Further, they may also need to comply with requirements asking them to mention their license number in full.

Some mortgage brokers can be “credit representatives”, or franchisees of a mortgage aggregator. In this case, if the aggregator has a license, the mortgage broker need not have one. The reasoning for this is that the franchise agreement usually requires mortgage brokers to comply with the laws applicable to the aggregator. If you’re speaking to a mortgage broker, you can ask them if they receive commissions from lenders, which is a good indicator that they need to be licensed. Consider requesting their license details if they don’t give you the details beforehand. 

You should remember that such a license protects you if you’re given incorrect or misleading advice that results in a home loan application rejection or any financial loss. Brokers are regulated by the Australian Securities & Investment Commission (ASIC), as per the National Consumer Credit Protection (NCCP) Act.