What Are the Causes of Bad Credit Rating?

By Angela Monroe - June 25, 2019

Can’t get approved for a loan because of your bad credit rating? It’s always bound to happen because “bad credit” is a red flag for lenders. It says that you have been irresponsible with your money and debt obligations in the past. It also warns them that you’re likely to default on the repayments. In this article, we’ll discuss the causes of bad credit rating and know how you can avoid them.

How Bad Credit Rating Is Acquired

There are a lot of factors that can be causes of bad credit score or rating. You do not acquire it overnight. Instead, you earn it based on your history of credit use and repayment.

This history is developed from the records submitted by your previous lenders to the credit reporting bureaus. These agencies, in turn, compile your credit information and assign you a credit score to help lenders decide how risky it is to offer you a loan in the future.

The biggest causes of bad credit ratings include:

1. Loan Default

A loan default means that you’ve chosen not to pay back the lender with the money you owe. Typically, a lender sends a formal loan default notice by post after you miss out on 3 to 6 repayment periods. The default record will stay on your credit file for 6 years from the date of issuance regardless if you pay off the debt or not. Once it is removed, however, the lender won’t be able to register it again even if you still owe them money.

2. History of Late Payments

Payment history comprises 35% of your total credit score. Thus, consistent late payments on your credit card and loan balance significantly affect your credit score. Credit reporting bureaus forecast your future long-term behaviour based on past long-term behaviour. 

3. Insolvency 

Insolvency is a legally binding solution that writes off your debts and gives you protection from your lender when you can’t afford the repayment on the agreed time frame. While insolvency solutions, like Individual Voluntary Arrangements (IVAs), Debt Management Plans and Minimal Assets Process (MAP) can help you legally resolve a previous debt, it won’t do any good on your credit score. However, you can gradually rebuild your credit score once you complete the insolvency process.

4. Bankruptcy

If your business fails, filing for bankruptcy can resolve your financial woes by wiping out your unsecured debts. However, your credit score would seriously plummet, like falling down to a terrible 250 credit score from a once high score of 750. The record will also stay on your credit file for 7 years, slimming down your chances of getting business financing in the future. 

5. Car Repossession

When you can’t repay a car loan and your vehicle is secured against the loan, the lender can take back (repossess) your vehicle and sell it to recoup the money. Just like bankruptcy, a repossession record significantly hurts your credit score and stays on your profile for 7 years.

6. Home Foreclosure

A lender can file a foreclosure notice against your home if you have been delinquent on your mortgage payments for at least 3 months. They can force the sale of the home to recover the loan balance.  Aside from losing your property, the foreclosure record shrinks your credit score and makes it almost impossible for you to get approved for future mortgage loans.

7. Account Charged Off

If you miss several payment dues on your credit card bills, the issuer can charge off your account, which is equivalent to a loan write off. This means that they’ve given up on the collection because they think you’re not going to pay at all. However, you are still responsible for the debt. 

8. Account In Collections

Typically, after a creditor charged off your account, they send your account to collections (or third-party debt collectors who would try to collect the funds from you). A collection status on your credit profile suggests that the creditor was forced to hire third-party debt collectors because you’ve given them a difficult time. 

9. Court Judgement

A judgement record on your credit profile not only suggests that you’ve avoided paying your debt. It also means that you’ve forced the creditor to get the court involved to try and collect the money from you. Both paid and unpaid judgements negatively affect your credit score, but the latter is the worst.  An issued court judgement also remains on your credit report for 6 years.

10. High, Maxed Out and Over-The-Limit Credit Card Balances

One of the major causes of bad credit rating is your level of debt. This is measured by credit utilization and another important factor that affects your credit score. Having high credit card balances, maxed out credit limit, and over-the-limit credit card balances increase your credit utilization and decrease your credit score. 

11. Several Loan Applications or Inquiries

Credit inquiries account for 10 % of your credit score. Your score will drop if you make several loan inquiries and applications within a short period of time. When you inquire or apply for a loan, the lender pulls out your credit information from the credit reporting agency. The number of times your profile is checked by lenders will be recorded as “hard credit inquiry”. Each hard credit inquiry can reduce your credit score from 5 and 10 points. However, all inquiries made within 2 weeks will be counted as one. If you want to do a loan shopping to compare interest rates and loan terms, do it within this period.

12. No Credit Records

If you’ve never used a credit card or secured a loan before, your credit score will be low. This is because you have an insufficient credit history. Lenders cannot assess your creditworthiness or your attitude towards debt. Hence, they don’t have much assurance that you will repay the money you owe.


Bad Credit Loans for People With Bad Credit Rating

If you have a bad credit rating and you need to get financing, get a bad credit loan. This type of loan is usually secured, which means that you need collateral to get approved. Typically, the asset that you want to purchase becomes the collateral, like in an equipment loan or car loan. You may also need to provide a large down payment of around 10 to 20% of the total loan balance. Additionally, the interest rate will be higher and the terms will be less favourable than standard consumer loans. 

Your bad credit rating has made you a high-risk borrower. Based on it, there is a high chance of you not completing your debt obligations as agreed. All the less favourable loan conditions compensate for the high risk of not being repaid that lenders take. Learn how to avoid the causes of bad credit rating and you’d be on your way to a stable financial standing.


Loans For People With Bad Credit offers alternative financing to people who are suffering from bad credit rating. With more than three decades of experience and over 30 different lending partners, we can help you find the right bad credit loan with reasonable loan terms and interest rate. Call us on 1300 769 384 or fill out the Bad Credit Loan Pre-Approval form.

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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