[Updated April 19, 2023]
Bad credit can have an adverse effect on one’s financial decisions. It can limit your access to finance, thereby limiting your plans to do things that require finances such as buying a new car, financing a new business or expanding an existing one, and even buying a home.
Most lenders practice due diligence when providing loans to borrowers. They check your credit score to determine the risk involved in extending credit to you. Thus, building and maintaining a good credit history is important as it determines whether you have access to finance or not.
What Affects My Credit Score?
Your financial habits are the main determinants of your credit score and credit history. Mostly, the credit score is an outcome of the analysis of your financial information. Thus, it takes into consideration things like your previous credit applications, your loan repayments, outstanding loan balances, and any adverse credit-related activities. If in the past you have defaulted on any loan, it would reflect on your credit score. Similarly, late repayments have a negative impact on your credit rating.
Sometimes, errors in the credit report may be responsible for pulling down your rating. Such errors may not be your doing and should be rectified as soon as you identify them.
Tax Implications of a Good Credit Score
A good credit score does not have a direct tax implication. However, it will allow you to have access to loans and lines of credit, which has tax implications. Interest payments on mortgages are tax-deductible. Further, a good credit score affords you access to credit at low interest rates. That can save you money on interest, which you can use to pay your taxes.
How Do You Get a Credit Rating?
Anyone that has ever applied for a loan has a credit report about his or her creditworthiness. By law, everyone is entitled to a free credit report every 12 months or within 90 days after receiving a credit rejection. However, you can always get your report at any time at a small fee. You can get a copy of your credit report from one of the major credit bureaus, which include Experian Australia, Equifax, and TransUnion. You can also get a copy from Illion. The credit report has your credit rating, which lenders use when assessing whether to lend you money or not.
How Credit Scores Are Calculated
Your score is a product of information in your credit report. It takes into consideration the number of credit applications you have made, the amount of credit you borrow, and the timeliness of your payments. The score often ranges between zero and 1,000 or 1,200. The higher your score, the better your chances of getting credit from a lender. That is because a higher score suggests less risk.
How to Build Good Credit in Australia
Building good credit history requires financial discipline. You have to be ready to stop doing the things that harm your credit ratings. Some of the bad financial habits that lead to poor ratings include borrowing more than you can pay back, being late in debt repayment, and failing to pay credit balances in full when due. Changing these habits would be a huge step toward building your score.
1. Strategic Payment of Credit Card Balances
One way to build good credit is to ensure that the credit card issuer reports low balances on your card when reporting to the credit bureaus. That helps maintain a healthy credit rating. To achieve this, you can have a strategic payment plan where you ensure you pay your balance before the end of the billing cycle. You can also make several payments throughout the month to ensure the balance remains low. Further, try to utilize as little as possible your credit limit. Most people with good scores utilize their credit limits to as low as 7%. A utilization rate of not more than 30% would be healthy. Keeping your utilization rate low is very important, as it is the second most important factor when determining your score.
2. Having Higher Credit Limits
The impact of higher credit limits on your score is profound. You can maintain your balance while operating at a higher credit limit. That would lower your credit utilization. Lower credit utilization would improve your credit ratings.
3. Credit Piggybacking or Authorized User Status
Sometimes you do not have to rely on your credit history alone to build your scores. You can also use another person’s good credit history. That is possible by becoming an authorized user. That means that you add a relative or friend’s credit card account to your credit reports. Through authorized user status, you get to benefit from the primary user’s good history. When opting for authorized user status, always ensure the credit card account has a high credit limit and a good history of timely repayments. That would improve your credit utilization and credit rating. It is also important to ensure the account is linked to Experian, TransUnion, and Equifax for the best outcomes since they are the major credit bureaus. This method is highly effective for those new to credit and with a short credit history.
4. Paying Bills on Time
This is perhaps the most effective strategy to build good credit scores. If you are constantly paying your bills late, no strategy is likely to redeem you from the low scores that result from your late payment. Late payments can also remain on your reports for many years, meaning that it would taint your score for a long time. That underlines the importance of timely credit payments. You should always ensure that you pay your bills when due. If you are late on any payment, ensure you call your creditor and request them to consider not reporting the missed payment to the bureaus. You have to ensure that you pay the bill as soon as possible.
5. Resolving Credit Report Errors
Sometimes, an error in the credit report may be the reason for a low score. Some errors include payments appearing as late payments when you made the payments on time, another person’s credit activity is mixed with yours, and old negative information still being listed. Since you are entitled to free reports from any of the major credit bureaus, you can request your report and go through it to check for mistakes. You can then dispute the mistakes. If correct, that would improve your scores. Fixing mistakes in the credit report is a free service that you can access from the credit reporting agency or bureau.
6. Using a Credit Card
Contrary to what most people believe, having no debt does not always translate to creditworthiness. It may sometimes reflect the inability to manage debt. Most lenders prefer lending to people with an observable credit history. They may be reluctant to lend to someone with no history. Thus, it is advisable to have a credit card and manage it well. That would help build your scores as it develops a credit history that lenders can rely on when assessing your creditworthiness.
7. Limiting Your Credit Card Applications
Every time you apply for a credit card, it goes to your credit file. That may lower your score because it may indicate that you are incapable of managing debt. To the lenders, it reflects financial desperation. While it is good to have credit cards to improve your score, taking too many credit cards can bring down your score. Therefore, try to keep your credit cards as few as possible.
8. Using Secured Credit Cards
A secured credit card is one with a cash deposit backing it. For this card, you pay upfront an amount equal to your credit limit. The credit card is used as a normal credit card. Making on-time payments for this card will help you build your credit.
What If You Have a Bad Credit Rating?
A poor credit rating can harm your loan applications. However, bad credit ratings do not mean the end of the world. You can reverse and improve it. That only depends on the reason for the bad rating. For instance, you can rectify a bad rating resulting from errors in the credit by correcting those errors. However, you have to be careful not to fall for companies claiming that they can clean your credit report at a fee. The only thing you can remove from your report is an error, and that should be a free service. Any correct information would remain there until you have sorted it out the right way.
For bad ratings resulting from late payments, you can rebuild your rating by making consistent timely payments to your credit cards. You can also use the secured credit card to help rebuild your credit. Paying for things like rent, mortgage, and utility bills in time may also help rebuild your scores.
Do Zippay and Afterpay Affect My Credit Score?
If you’re thinking about using Zip Pay, you may be wondering what impact it will have on your credit score. It’s important to know that Zip Pay will check your credit score when you apply for the service, and it may affect your rating if you don’t pay on time or default on your repayments. You shouldn’t have any issues as long as you’re responsible with Zip and are making payments on time.
Afterpay doesn’t require a credit check before you sign up, and using it won’t affect your credit score. However, it will reserve the right to check your credit and report any negative activity on your account to credit reporting agencies.
This could leave you in a tight spot later down the line when applying for more significant loans, like a mortgage. But it’s up to Afterpay whether or not to pass on this information to third parties.
What to Do When Credit Trouble
If you always find yourself struggling to pay your debt, you may be having credit management problems. You may need to seek assistance. Although there are debt consolidators that charge a fee for their services, you can make use of other available free options. You can speak to someone through the National Debt Helpline, who would give you free, professional and confidential financial advice. The National Debt Helpline website also offers step-by-step guides on how to solve most of the common debt problems.
*General Advice Warning – “Any financial advice provided by TaxReturn.com.au is general in nature and is not personal financial advice. It does not take into account your objectives, financial situation, or needs. Before acting on any information, you should consider the appropriateness of it regarding your own objectives, financial situation and needs.”