How Does a Low Credit Rating Affect You?

By Angela Monroe - March 16, 2022

low credit rating effects

A low credit rating might, on the surface, just be numbers but it can dramatically affect a borrower. It’s worth understanding how a low credit rating can affect your situation.

If you have a low credit rating, or are concerned you might have, and want to take out a loan, the information below can be a real help.

Firstly, what is a credit rating?

what is a credit rating

Most Australians don’t even consider their credit rating (or even know they have one in some cases) until they need a loan.

Almost everyone requires “credit” at some point in their life, whether to buy a home, a car, or get a phone on a plan. There are more forms of credit than just those;

  • Credit cards
  • Finance for life events like weddings
  • Court / legal fees
  • Renovations
  • Medical expenses
  • Buy now, pay later (eg. Afterpay)
  • Business funding

In fact, it’s pretty rare to find someone who never needs credit in their lives. But for the rest of us, we do need credit and that means a credit rating is important. 

It can be a real obstacle if you have a low credit rating.

Credit ratings are scores between 0 and 1,200 or 0 and 1,000, depending on the credit reporting agency. The scores can even go into the negatives in some extreme cases.

Your score is based on your credit history which is recorded in your credit record.

In Australia, you’ll typically generate a credit report the first time you apply for credit and are over 18 years old.

Generally, the lower your rating, the higher risk you are to a lender. If you have a low score, you could be more likely to either pay higher fees and/or struggle with getting approved for a loan.

If you’re not sure what your credit score is, get a free credit check.

How does a low credit rating affect you?

affected by low credit rating

If you have a low credit rating, it could mean that successfully applying for a loan becomes very difficult. This could affect you buying a home, a car or making other large purchases.

A low credit rating means that a borrower has a low credit score caused by missed or late repayments, outstanding (overdue) debts, court rulings against them or too many finance enquiries, among other things.

Low credit ratings can cause lenders who offer low interest rates and large loan amounts to decline these types of borrowers meaning they have to seek lenders who assist with low credit ratings. This can mean higher interest rates and a more difficult process in getting approved, for example, having to provide more documentation.

It can also mean an approval is not possible altogether.

It’s important that you seek expert advice and get help to find the best loan possible with your bad credit rating. Get in touch with us for advice.

What can cause a low credit rating?

Payment history

Lenders (eg. banks) check loan applicants’ credit history before approving them for a loan.

They want to know about your payment history, including details such as whether or not you have always paid bills on time, whether you regularly miss payments, and whether you have many outstanding debts.

A poor payment history in previous or existing forms of credit is a key cause of low credit ratings and, therefore, higher interest rates or loan application declines.

Amounts currently owing

This is useful to a lender to know as it indicates whether you are currently in debt and if so, how much you owe.

Ideally, you should always try to pay off outstanding loans through regular monthly payments. With credit cards, you should try not to exceed 30% of your credit limit.

Some people find that debt consolidation works well. This means taking out a new loan to pay off multiple existing loans and getting more favourable terms such as a longer loan term, lower interest rate or lower scheduled repayments.

Duration of credit history

This means how long you’ve been using credit. For example, if you first applied for credit (eg. a phone plan) when you were 18 and you’re now aged 30, your credit history is 12 years old.

Generally, a longer credit history is more favourable but that’s assuming it’s good credit history with no late or missed repayments. 

A new or “young” credit history can be a problem for younger people wanting to take out their first loans.

Making regular repayments to a phone plan or credit card when you’re young can help build credit but only look into this if it suits your circumstances.

Credit applications

It’s easy to make numerous credit applications, especially with the speed that you can do so online. 

It may even seem like a good idea to shop around, but you’d be mistaken as each time you formally apply for credit, it’s recorded on your credit report.

Be aware that lenders will check your credit applications and numerous enquiries to different companies will raise red flags for them.

Try to only make a credit application if you genuinely need it. Alternatively, leave it to us and speak to one of our experts today.

The team at Loans For People With Bad Credit are able to match up your circumstances to a lender to give you a good idea of the numbers without putting a mark on your credit file or affecting it in any way until you give the go ahead.

Understanding low credit

understanding a low credit rating

If you have a bad credit rating, you are likely to pay much higher interest rates on a loan.

It’s important to remember that a bad credit rating doesn’t have to mean that you can never secure a loan in the future. In fact, credit reports and credit scores not only heal but improve and increase over time – assuming you make regular and timely repayments and keep the enquiries to a minimum.

Speak to one of our experts today to help get you on the right track to improving your credit rating and finding the right loan for you, even with a low credit rating.

Angela Monroe
Angela Monroe is the Community Manager at The Positive Group, specialising in giving people the information that they need when they need it, and putting you on the path to a fair financial future. She has 8 years of experience in helping Australians find the right finance solutions, and regularly contributes articles to empower Australians with the knowledge they need to become financially healthy.

Comments

No comments yet.

Sorry, the comment form is closed at this time.

  • Quick Quote

  • Related Posts