Your credit score is a numerical gauge of your financial well-being. It determines your chances of getting the best rates on loans, refinancing your mortgage, buying a car, or renting an apartment.
You use credit whenever you take out your credit card, so maintaining the strength of that credit is essential if you want to maintain financial resiliency.
In Australia, there are three comprehensive credit reporting bodies with varying parameters, so your credit’s true strength may change depending on which organisation files the report.
These bodies (and their respective score) include:
- Experian: 0 – 1,000
- Equifax: 0 – 1,200
- Illion: 0 – 1,000
Here are some common credit mistakes that can damage your score, and recommendations for how to fix them, but first it’s crucial to understand what constitutes as a bad credit score.
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What’s a Bad Credit Score?
A poor credit score can leave a stain on your reputation in the eyes of lenders such as banks. These institutions may classify you as a high-risk borrower and can choose to withhold credit and reject applications.
Poor credit can also affect your ability to scale businesses with loans or pay off debts. Therefore, it’s important to stay on top of your finances if you’re gunning to apply for a loan in the future.
If you’re curious to know how you fare, click here to determine your free credit score report.
What Are Common Mistakes That Hurt Your Credit Score?
Here are five common ways your credit score is damaged.
1) Late or Missed Payments
A borrower’s repayment history is the single most influential factor on a credit score. About 35 per cent of your credit score is determined by your repayment history, according to Experian. A borrowing history filled with late or missed payments can leave a lasting impression that can be hard to overcome.
If you’re struggling to make ends meet, consider contacting your lender in advance if there’s any room for negotiation—even if it is to reschedule your monthly payments.
2) Using Too Much Credit
Poor credit utilization can also hurt your score. The total amount of revolving credit you are currently utilizing divided by the total of all your credit limits is your current credit utilization percentage.
For lenders, a credit utilization score of under 30% is a sign of a healthy borrower. However, if you can push that figure even lower, like at 10%, the better your chances will be in securing a loan.
3) Inquiring for Multiple Credit Requests
Applying for multiple loans within a short amount of time is only going to damage your credit score. When you apply for new credit, it can cause lenders to see you as desperate and unable to pay back due to a considerable financial strain.
Multiple inquiries in a quick period of time could subject you to higher interest rates or rejection altogether, even if your score wasn’t significantly damaged by the time of the application.
4) Negative Account Standing
If you have a history of bankruptcy, repossession, foreclosure, or failed obligations to pay a debt, you will be considered high-risk. This can result in increased interest rates for loans and credit cards – or a flat-out rejection.
5) Failing To Review Your Credit File
In some cases, your score may be low due to a mistake on the lender’s part in recording your prior transactions. Issuers try to ensure accuracy, but typos or other errors can slip through the cracks.
For example, if you were late on a credit card payment because your bill didn’t arrive, this should be listed as a missed payment and should not negatively damage your score. However, there may be times when the issuer misses this and counts this against your score.
As the best measure, review your file on occasion and verify its accuracy. You could find a mistake on their part and dispute it.
How to Improve Your Credit Score
If you’re looking to improve your credit score, you should know that it takes a little time. Lenders typically look for a history of at least six months before considering you as potentially stable and creditworthy.
To improve your score, try to take the following actions:
1) Pay Off Outstanding Payments
Any payments due over the past 30 to 90 months can be reported to your credit bureau. Equifax claims that a payment made 2 weeks after its due is already considered late, and can subsequently reflect harshly on your score. Once they’re notified about your lack of payment, this can spell disaster to your credit score.
When you miss or default on payments, it causes your score to drop as lenders begin missing opportunities and increasing the risk of defaulting on future loans. The longer you go without paying, the worse your score will be.
2) Pay Bills on Time
Letting late or missed payments slide will only harm your score. As mentioned above, repayment history is a critical factor for lenders to decide whether you’re fit as a borrower.
Therefore, make sure to compensate for any money owed, even if it’s not due to be paid yet.
3) Reduce your Debt
The closer your credit card balance is to zero, the better your chances are of acquiring a loan. Decreasing the rate of your credit utilization ratio is a surefire way of looking like a potential prospect for financial institutions to lend to.
4) Counter any Negative Claims in the Report
Check your credit file thoroughly once a year to make sure all information reported is accurate. If any credit accounts are outdated or inaccurate, you can try disputing them with your lender in an effort to have them removed from the report.
If you find an error, like a misspelled name or missing account, make sure to notify relevant parties to rectify it immediately. More importantly, if you find a payment that’s been made but has not yet been recorded as such in your credit file, dispute it with the bureau to have it reported accurately.
5) Ask for Credit Only When Necessary
Only apply for credit when you truly need it and try to limit inquiries to up to once every two years as much as possible.
It’s a myth that individuals with a great credit history will easily find a loan by simply asking for one. Lenders look at your willingness to commit as a sign of whether or not you’re financially stable and reliable.
Your loan inquiries will stay on your file for up to two years, but they can fade over time.
About Carson Derrow
