It’s easy to find yourself quite deep in debt, with maxed out credit cards and monthly account statements reminding you of just how far behind on your payments you are. The catch-22 is that vowing to never have any form of credit (ever again) won’t work in your favour either – lenders need a record of your credit payment patterns to assess the potential risks involved in giving you a loan.
Need to fix bad debt? You have your work cut out for you, but follow these tips and you’ll improve your credit score.What is a credit score and how is it calculated?
A credit score is a 3-digit number that serves as a risk-ranking tool for lenders. It helps banks and loan companies assess the potential risk involved in loaning you money. When assessing an applicant’s creditworthiness, different lenders rate credit scores differently: some lenders require you to have a higher credit score than others before they’ll consider loaning you money or extending your credit line. If you are curious about your credit score, you can confirm your current score with online credit reporting agencies like Veda or a mortgage broker who can apply for this information on your behalf.What are the disadvantages of having a bad credit history?
Bad credit is bad news. If they view you as a riskier applicant, lenders will charge you higher interest rates than other applicants with better credit scores. This means that you’ll pay more interest over time, which can add up to tens of thousands of dollars extra over the life of your loan.
Your credit score will also affect how willing lenders will be to approve your loan applications – some may reject your applications outright if you have elevated credit risk. The terms of your loan may also be more restrictive with a lower score. Some lenders, for example, may require you to pay a larger down payment. The difference between down payment requirements between an applicant with a good credit score and one with a bad score can be as much as 15%.
How can you improve your credit score?The good news is that there are ways to improve a less-than-sterling credit score. It will, however, take some time and self-discipline to do so. Our advice? Take six months to work through these credit score hacks:
- Seek independent advice from a financial planner or accountant
- Start paying your bills on time to reduce your credit history of overdue payments
- Meet your loan repayments
- Lower the limits on your credit cards
- Build your savings to show a three- to six-month savings history
- Consolidate your loans to pay them off sooner
Sometimes the prospect of getting out of debt can feel very overwhelming. CEO of Debt Relief Assist, Nicole Crosisca says getting back on track with your finances can be best achieved with a team approach.
“Creditors are willing to negotiate with debt relief specialists and so it is a good idea to engage the expertise of a professional who is experienced in negotiating and has long standing relationship with many institutions", she says. "Having someone advocate for you under difficult circumstances can be incredibly comforting."
Contact us to have a quick chat about how you can free up the equity in your home loan.
