Understanding Bad Credit: What Makes My Credit “Bad?”

October 4, 2021

Understanding Bad Credit: What Makes My Credit “Bad?”

A bad credit score will affect everything from your ability to rent an apartment to even getting a job. Did you know that making on-time car loan payments can actually boost your score? Thankfully, we have solutions to help you get a car loan, despite a low score.

If you’re unsure why your score is so low, we’ve rounded up a full list of what brings credit scores down. From missing payments to using too much available credit, we’ll go over what lowers your score and how you can improve it. Let’s jump into more ways to improve your score and get you into your new car.

Credit Score Ranges – What is Bad Credit?

In Australia, credit scores can range from 1,000 to 0. We’ve broken down each score range according to Experian so that you can see where you rank.

  • 800 – 1,000 is considered excellent
  • 700-799 is considered very good
  • 625-699 is a good score
  • 550-624 is a fair score
  • 0-549 is a below-average score

Missing Payments

Missing payments is one of the worst things you can do for your credit. Making payments late or not making them at all will reflect on your score each time. To help boost your credit score, you’ll need to keep up with your payments.

Make your payments on time each month. If you’re unable to make them, you’ll want to call the company to set up an arrangement. They may give you more time or work with you on stopping your service if needed until you can make payments again.

If you completely miss payments, your account will likely end up in default. For some services, they may cancel your account while others will be forced to bring you to a collections agency to try and reclaim the balance you owe.

Too many negative accounts or accounts in collections will bring down your credit score. If you’re having trouble keeping up, try taking a look at all your expenses and cutting back to only the essentials.

Defaulting on Loans

Defaulting on student loans, mortgages, or car loans will significantly lower your score. Unlike a missed payment to your gym, these defaults stick around on your credit. Defaults will stay on your credit report for up to five years.

The good news is, that your credit score doesn’t stay the same forever. After this five-year period, the default will drop off and your score will go up. It’s important to stay out of default and always communicate with your lenders.

It’s easier for a lender to work with you before you default on your loan. If you wait until after the loan has defaulted it becomes much more difficult to get caught up or back in good standing. At this point, the default is also already recorded on your credit report.

Having too Much Debt

Your credit utilization ratio weighs heavily on your score. This number refers to how much credit you’re using compared to how much available credit you have. Let’s say you have a credit card with a 3,000-dollar limit. If you’re only using 50 dollars a month, you’re barely using any of your available credit.

The less credit you use compared to what you have available, the better. If you’re maxing out your credit cards, this is going to reflect poorly on your credit report. Using too much credit will bring down your score.

One of the best things you can do is to not use all your available credit. Make your payments on time and pay as much of your balance as possible. If you pay off your credit cards, keep them open for a while. Having credit cards with balances free shows that you’re responsible when it comes to money.

The less debt you have, the more you’re proving you can handle debt. Closing your credit cards reduces the amount of credit you have available to you. Keep them open, out of sight, and watch your credit score go up.

Not Enough Credit History

If you haven’t had a long credit history, this will often lower your score. Young adults who haven’t had loans and credit cards yet will need to show some credit history in order to raise their scores. The best way to do this is with your first car loan, student loan, or credit card.

Keep your balances low and make all your payments on time. After a couple of years of account history, you’ll see your credit score go up. After you’ve had credit cards and other loans for several years, a lender will see that you have a long history of accounts in good standing.

Opening too Many New Accounts

When a lender pulls your credit report, this is known as a “hard pull”. A hard credit pull will negatively impact your credit score. Applying for a new car once every several years, however, won’t damage your score. It’s opening too many new accounts in a short period of time that spells trouble.

You don’t want to open too many new accounts in one year. For example, if you go and open up three new store credit cards in one week, the credit reporting agencies will take note of this. The next time you go to apply for a loan, your score will be lower, and you may have to explain all the new credit.

Opening too many new accounts shows a potential spending spree or overuse of credit. This shows lenders that you also have a higher chance of going into debt. Only open new accounts when you have to.

Remember that car loans and mortgages every few years, for example, aren’t considered reckless account openings. Checking your own score also doesn’t reflect on your credit. You can check your own score as often as you’d like to keep an eye on your finances. This doesn’t count as a hard pull on your credit.

How to Boost Your Credit Score Quickly

Your credit score won’t stay the same forever. Just because your score is low now doesn’t mean it will stay this way. Thankfully, negative reports, defaults, and even bankruptcy will fall off your credit report eventually. To boost your score now, there are a few easy things you can do to keep your credit on track.

To start, create a budget for yourself. It’s tough to manage your money if you aren’t sure where it’s going. Write out all your expenses so you know what bills you need to pay. If there’s anything you can cancel or cut out, do so.

Cutting unnecessary expenses will help make sure you can afford the expenses you have to pay. Car loans, rent, and utilities are examples of fixed expenses. These are bills you have to pay. Music subscriptions and group fitness classes are examples of expenses you can cut if you need to.

You may be surprised to see you currently pay for three yoga classes you don’t use after you’ve written everything out. Next, make a plan to pay off your debts and make all your payments on time. The less debt you have, the more your credit score will rise.

Keep Track of Your Own Score

If you’re still asking yourself, what makes my credit score bad? It’s time to take a look. One of the best things you can do for credit is to pull your own report. Many major banks and credit card companies allow you to see your credit score for free.

Go to your bank or credit card website and sign up to check your credit score. This is a free service offered by almost all major banks. From there, you can see your own score and what is dragging it down. Keep checking in on your score and your budget by holding monthly meetings with yourself.

You can also download a full copy of your report yourself online. Go through and see where you can make improvements. It’s always better to know where you stand versus getting blindsided when you go to apply for a loan.

Applying for Bad Credit Car Loans

If your credit is less-than-perfect, there are still car loan opportunities available to you. Making your car loan payments on time each month will actually help boost your credit score. On-time payments show you can be responsible with debt and credit.

If you’re ready to speak with a loan expert about your next car loan, fill out the contact form here. We’ll help you find a loan that works for you and your current financial situation.

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