Have you ever been told that you have bad credit? Are you wondering what it means? Poor or bad credit is the result of your past or present financial mistake where you might have defaulted on a payment which can either be a loan repayment or a bill. This is not to be confused with a low credit score or a poor / bad credit score. Bad Credit may or may not be present on your Credit File. So make sure you are understanding what is being said when someone says you have bad credit.
If you have been through a stressful financial situation in the past, there might be instances that it can haunt your financial present.
Some of the circumstances that lead to poor or bad credit are:
- Defaulting on a loan repayment or bill: When you fail to make a payment to a bill or a loan repayment, it can negatively affect your credit file and in turn put you in the poor credit area. Being in default on your loan is basically missing a repayment. If continued and not rectified by you the lender can lodge a credit Default against your name. So when you are asked “if you have any defaults” you are being asked if there are defaults on your credit file. Defaulting can occur due to many reasons. These reasons range from being forgetful, going through financial hardship, mistake, dispute, marriage breakdown and maintaining debts is not the priority. A Credit Default is usually listed against your name on your credit file.
- Arrears: Falling into arrears or missing a payment can place you in the poor credit category. At the time of a lender assessing you for credit if you are supplying statements for current debts that show arrears and/or missed payments you are seen as a credit risk. The number of arrears, the type of debt that has the arrears, the $ amount of arrears as well as how quickly they were paid and the explanation, all determine what the new lender will think. If the lender with the arrears has reported the arrears to a credit reporting agency like VEDA then they will lodge a Default on your credit file. Sometimes you have arrears and they are never reported. Keeping in touch with lenders during financial difficulty can really assist in keeping the lender from reporting it to a Credit Reporting Agency. We strongly recommend to everyone that if you are missing payments to speak with the lender and do not hide.
- Court Judgment: A court Judgement on your credit file is serious. This means that the business or lender that you owed money to took the case to court. If they win then a court judgement is marked against your name. Court judgements are more likely to be council rates, legal fees or other businesses that are owed money by you. Lenders generally do not place court judgements. Judgements are listed on your credit file and can seriously affect any applications you make for finance.
- Bankruptcy: Being bankrupt is difficult to manage, but getting a loan during or after bankruptcy is very difficult. When you go bankrupt, it is reflected in your credit file and sometimes can remain for many years. This can affect your financial options including borrowing money as well as opening a business. It can affect some areas of employment. This is listed on your credit file and also remains on a bankruptcy search.
- Being unemployed: Unemployment is not a reflecting on your credit history, however some lenders do not like approving loans for a person who is unemployed. If you are unemployed, banks or prime lenders may reject you out as their criteria requires employment or income that is not reliant on benefits. This is not on your credit file however it generally will place you in a poor credit situation for when lenders assess an application. There are lenders who may assist, however you will still need to show you can afford any loan you are applying for.
- Non tradition income or income that cannot be proved: There are times when you cannot prove the income you are earning. If you cannot prove the past, present or future sources of your income, some lenders will consider you as high risk as they cannot verify affordability. This could be self-employed income, a seasonal worker, casual etc. This is not on your credit file however it generally will place you in a poor credit situation for when lenders assess an application. There are lenders who may assist, however you will still need to show you can afford any loan you are applying for,
- Poor/ Bad or Low Credit Score: Having a Poor or Low Credit Score also affects your borrowing power with some lenders. A poor credit score is determined by various factors and the truth is each lender has their own credit scoring system. This is not the same as VEDA however VEDA can indicate whether it is high, average, or low. Certain facts about you can contribute to the score. How long you have been employed, how many times have you moved in 5 years, how many assets you have based on your age and working life, how many debts compared to assets, how many credit enquiries are on your credit file, how much you need to borrow compared to the value of your home. Etc. These are only some of the known factors that can contribute to your score.
- Too many enquiries: This is a big contributor to your credit score. When you shop around for a loan or for utilities like phone companies, they will all perform credit checks your credit file. If they are the supplier of the credit then it will leave a credit enquiry on your file. Some companies that check your credit files as an Access Seeker can access your file but not leave an enquiry, like many mortgage brokers. We recommend you do not apply for credit unnecessarily or if you are having difficult you may want to think about using a Mortgage Broker. This can limit the number of enquiries as you do not have to apply to so many lenders.