How to improve a bad credit score and land a home loan

You might have saved enough for a deposit on a car or a house, but your dreams can be crushed at the last hurdle if your credit score isn’t up to scratch.

If you need to get a loan for a big purchase, your lender is going to look up your credit score to determine your trustworthiness as a borrower.

Score well, and you can go ahead with the loan at a reasonable interest rate; score badly, and you could have difficulty landing a competitive interest rate or a lender at all.

How to improve your credit score

If you’ve done some damage to your credit rating, the first step to redemption is taking accountability and paying off any outstanding debts.

Experity director Clint Howen said contacting the organisations to which you are indebted is the first step to clearing debt from your credit report.

“For example, if it’s a bill with Telstra, the process would generally be to go through Telstra and say, ‘Hey, I’ll repay this debt, whatever is outstanding, sorry. How do I get this off my report?’” he said.

If you are having trouble paying off overdue bills that are affecting your credit score, you can get a loan or use a credit card to help pay it off.

But if you go down this route, tread carefully.

Mr Howen said if you are using a loan or credit card to pay off debt, make sure the limit is low; for example, if you are using a credit card, make the limit $500 instead of $5000.

“Yes, that does work … but be as cautious as you can, because you can easily end up in a much worse position,” he said.

There are also professionals who specialise in clearing your credit report, which can be a good option if you have several issues with it or need it cleared fast.

To protect your credit score in future, Fitzpatricks Private Wealth financial planner Gianna Thomson recommended paying your bills via direct debit to avoid missing a payment deadline.

University of Wollongong lecturer Loretta Iskra said resources offered on the government’s MoneySmart website could help improve your financial literacy and connect you with a financial counsellor if you needed one.

“Often people don’t know what they don’t know,” Ms Iskra said.

“So being able to have someone else give feedback on what’s cropping up … [is needed] so they can understand things that are more important in terms of their spending, and have an impact on their credit risk.”

How credit scores are damaged

A common way people damage their credit score is by missing payments on bills, even small ones, Mr Howen said.

“Any sort of subscription or plan that you have, or bill that you miss – that’s going to turn up on your credit report,” he said.

He said most people get caught out on smaller bills that they forget about, such as telco bills, which can haunt them for years.

Ms Iskra said occasionally you might not even be at fault, as a credit company may have accidentally duplicated a request for your credit report.

To make sure this isn’t the case, you can check whether things on your credit report have been listed twice, she said.

Investors Choice Mortgages director Jane Slack-Smith said sometimes a demerit on your report may not even be yours – for example, you could be taking the fall for a flatmate who didn’t pay the bill on time even though you gave them the money.

This is why you should request a free copy of your credit report and review it carefully, Ms Slack-Smith said.

You can access your credit report for free from a credit reporting organisation once every three months.

You can also request a free copy if you’ve been refused credit within the past 90 days, or if your credit-related personal information has been corrected.

But be careful: If your credit report has been requested too many times, this could ring alarm bells for potential future lenders.

How a bad credit score affects your loan application

If you have defaulted on a loan in the past, this could automatically disqualify you for a loan with another lender in the future, Mr Howen said.

Even if you eventually pay the due amount, it can take years for the default to be cleared from your credit report.

He said this could leave you stuck with “non-conforming” lenders who charge higher interest rates and are not regulated by the Australian Prudential Regulation Authority.

Ms Iskra said: “Having a good rating really allows you to have a better choice for a better range of options, and minimise the cost wherever possible.”