Ways to Improve Your Interest Rate If You Have Bad Credit

By Angela Monroe - June 26, 2020


Bad credit often attracts high interest rates. You may have seen advertised rates that look amazing – 5%, 2.9%, ZERO%! However, they’re often out of reach. We give you some top tips on ways to improve interest rates and get approved.

Did you know that financial institutions calculate interest rates based on risk? The more ‘risky’ a loan is, the higher the rate. In a nutshell, lenders aren’t going to put thousands of dollars on the line if there’s a high chance they won’t get it back. To make risky loans worthwhile, they’ll want more in return.

Check out these top tips on how to improve interest rates and actually get approved DESPITE having a ‘chequered’ credit history.

Stop Gambling

gambling table with cards

Often with a ‘risky’ loan, when an applicant has bad credit, lenders scrutinise bank statements. A red flag that often comes up is gambling. It’s evident when applicants spend money on online gambling or lottery applications as it shows on bank statements. To improve interest rates, avoid gambling in the months leading up to applying for a loan. Contact the gambling helpline if you struggle to cut down or stop altogether.

Pay by Card

woman paying by card

In addition to avoiding gambling, pay by card, not by cash. When lenders see cash being taken out of bank accounts, they sometimes fear the worst. It’s especially true with large and regular withdrawals. Lenders like to see where and on what applicants’ money is going. For example, $200 spent on groceries at a supermarket looks a lot better than a mystery $200 cash withdrawal on a Friday night.

Tip: ‘Account clearing’ is when somebody withdraws all (or most of) their income as soon as they get paid. To improve interest rates, avoid account clearing.

Watch Where Your Income Goes

kid looking through telescope

If you’re doing the majority of your spending by card, you’re on the right track. Your bank statements will be looking clean. To go even further, try to spend money wisely on things you need. Some lenders get worried when they see big purchases on electronic appliances, clothes, alcohol or luxury items. In the months leading up to the loan, purchase things you need, rather than want. This shows you’re responsible with money.

DON’T Shop Around

closed sign

With many financial decisions, shopping around for the best deal is… ideal. It’s not the case with loans. Each time you submit a loan application, the financial institution will leave an ‘enquiry’ on your credit file. Multiple enquiries, especially in a short period of time can really lower your credit score. Lenders also want to know what resulted from the enquiry and why you didn’t go through with it. This adds to the risk.

To improve interest rates, use a broker. Brokers are financial experts who spend all day matching clients to lenders. They’ll be able to select a lender that matches your circumstances without leaving enquiries on your credit file. Almost all lenders look at and rely on credit files.

If you’re over 18 and have previously applied for or had credit, you’ve got a file. This could even be a phone plan.

Think About the Loan Reason

man thinking on chair

Why someone wants a loan in the first place is an important question to answer. Most people wouldn’t hand over their money to a stranger who wants it for ‘personal reasons’. Financial institutions think the same way.

You’ll have to make sure your reason for a loan is legitimate. Often asset-backed loans attract lower interest rates. This is because lenders have the ability to repossess or take the asset back from someone who can’t or won’t repay the loan. A car loan is a good example of this. 

Co-Signer or Guarantor

signature tag on phone

Using a co-signer or guarantor significantly reduces risk on a loan. This is because co-signers are usually people with a good credit history, stable income and assets behind them. They sign the loan ‘promising’ to repay it if the primary applicant can’t. Lenders see them as a safety net. A common example is a parent co-signing or guaranteeing a loan for their son or daughter’s first car. These ‘safety nets’ improve interest rates dramatically.

All in All

man happy near wall

Using a broker rather than being a lone wolf makes a lot of sense. They’ll be able to match your circumstances to the right lender. If you have defaults on your credit history, you may need to contact past lenders and sort them out. By applying the above tips, you’ll be able to show lenders that you’re not a risk, therefore deserve a lower rate.

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.


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