If you’re planning on applying for a personal loan, prepare to have your credit history placed under the microscope. This information is incredibly important to lenders, and if you want to get in their good books you need to make sure your credit score is first-rate.
If your credit history has been less than spectacular, however, don’t fret. Below, we've compiled a few tips to help you clean up your profile and get you back in good financial standing.
1. Get a copy of your credit report
The first thing you want to do is get a copy of your credit report. In Australia, there are a number of credit reporting bodies you can contact to do this, but the main ones are Equifax, Experian and CheckYourCredit.
As a general rule, you can request a free copy of your report once every 12 months, or more frequently in certain circumstances, such as if you’ve been refused credit in the past 90 days.
2. Make sure there aren’t any errors
Once you’ve received your credit report, you’ll need to comb through it to make sure there aren’t any errors or listings you can contest.
Sometimes banks or lenders record inaccurate information or issues that have already been resolved. In that case, you’ll need to contact them and ask to have the listing removed. If it is indeed a mistake, they’ll get in touch with the credit reporting body so they can wipe it from your report as well.
Another thing to watch out for is if you’ve fallen victim to identity fraud. This is why it’s a good idea to check your report even if you aren’t worried about your credit score. You don’t want to be blindsided by news that someone has taken out a bunch of credit cards in your name.
3. Pay off any outstanding debts
Nothing will tarnish your credit score like an unpaid debt, so if there’s a bill you should have paid but haven’t, put it at the top of your priority list. If the bill is $150 or more and at least 60 days go by since a debt collector contacts you, this will be listed as a credit default and will stay on your report for five years.
Even if you pay it off, your report will still include mention of the default, though it will be amended to state that it’s since been paid. Obviously it’s best not to let it get to that point, but if this is the position you’ve found yourself in, those debts are better paid late than never.
4. Pay your bills on time
It should go without saying that all future bills should be paid promptly, so think about setting up direct debit if you haven’t already.
Recent changes to credit reporting practices mean lenders have a more complete overview of your entire credit history, not just the bad stuff like your infringements and defaults.
All your credit product applications, repayment amounts, and whether or not you make repayments on time feature on your report, which means there are more opportunities to win lenders’ favour if you’re responsible with your money. While you can’t undo past mistakes, lenders will notice if you’re on the right track.
Top tip: Moving apartments? Make sure your bank and utility companies know so they can update your details. The last thing you need is your bills going to the wrong address, as occupants of your old place are more likely to put them straight in the bin than track you down.
5. Minimise new credit applications
There’s a reason you shouldn’t apply for too many credit products. Each time you do, you rack up what’s known as a ‘hard enquiry.’ This is when a potential lender requests access to your credit history before doing business with you, and each request is recorded on your report.
A single hard enquiry isn’t anything to worry about. It’s when too many are made in a short amount of time that you risk jeopardising your credit score. Basically, it sends a message to lenders that you’re financially reckless or desperate for credit, neither of which paint a particularly favourable picture.
6. Consider credit repair
As a last resort, you might want to consider contacting a credit repair company. These can be costly - around $1,000 to fix a single listing on your report - so you should only give them a call if you’ve exhausted all other options.
Keep in mind that it’s not uncommon for companies to charge for services that can be handled for free, such as by getting in touch with an ombudsman, so exercise some judgement before reaching for your wallet.
While credit repair companies can help remove incorrect information from your credit report, there’s very little they can do about negative but factual information, so be wary of companies that claim to be able to scrub your credit history clean.
If this is what you’re dealing with, it’s probably best to start managing your debt instead. Think about lowering your card limits, putting a stop to any new credit applications, and maybe contacting a financial counsellor for some guidance.
What if I don’t have a credit history?
Your credit history is a record of how you’ve managed credit sources like loans and credit cards in the past. So what if your credit score is low because you’ve never borrowed money before?
Even if you’ve been nothing but responsible with your finances, your word won’t mean much — a lender is going to want to see proof.
One way to start developing a credit history is to apply for a low rate, no annual fee credit card - and then make payments in a timely manner. If you need help figuring out which card is best for you, head on over to our credit card comparison page.
It might take a while, but once you’ve got these things sorted your credit score should start looking much more impressive than it used to. Once you're back on track, you can start applying for a low rate personal loan to fund your next holiday, renovation or new car purchase. Check out our personal loans page for an idea of the types of loans that would suit you.