Look after your credit file
If you are struggling with debt, it’s also likely your credit file has been affected. You may have recently applied for finance and been rejected due to your credit file. Many people think in order to fix their debt, first they must fix their credit file. They invest hundreds of dollars in credit repair companies who are often unable to make much of an improvement and are left off where they began – in debt and unable to apply for a loan.
By fixing your debt problem, you will also take the necessary steps to start improving your credit file. Get to know your credit file, why it’s important and how you can take care of it.
What’s on your credit file?
Your credit file is a record of your financial history. It lists a number of applications transactions and financial details to give creditors a snapshot of how you handle your money. Your credit file may contain:
- Credit applications made in the past five years relating to loans for household, personal or family purposes as well as loans to purchase, renovate or re-finance a residential investment property.
- Details of overdue consumer credit accounts
- Your credit accounts such as credit cards or personal loans
- Account open date and close dates
- Credit limit. This is the maximum amount of credit available to you for an account. If you accept a credit limit increase the new credit limit could be included on your credit history.
- Monthly repayment history on your credit accounts. This will reflect whether you paid the minimum amount on time.
How does a default get on your credit file.
If you have a debt which is more than $150 and it is 60 days overdue your creditor has a right to mark a default on your credit file. A single default can make it hard to apply for a new line of credit. Several defaults will make it near impossible.
A default will remain on your credit file for 5 years. Unfortunately, once you receive a default, there is no way to have it removed. Even if you pay the debt in question, the default will remain and will simply be marked as paid. There is an option to dispute the default if you think it has been wrongly applied.
All creditors can list information on your credit file. Creditors include:
- Banks, credit unions and other financial institutions
- Service providers such as phone and electricity companies
- Any businesses which provide credit or goods and services before you have to pay
What will effect my credit file?
While a default on your credit file will impede your chances of getting a new loan or credit card, it is not the only thing a creditor will look for on your credit file. Things which might deter creditors include:
Having too many loan enquiries/applications. When you enquire about a new loan, your lender might ask to run a credit check to see if you area eligible. Even if you don’t proceed with an application, that credit check has been marked on your file. Having a number of theses checks on your file can send up a red flag to new creditors.
Having excessive accounts. If you have several credit cards, personal and secured loans, you may find it difficult to apply for more. Your creditor will do a means test to ensure you aren’t over-committing yourself. If it seems too much of your income is already committed to your debt, they may reject lending you more.
Not making minimum requirements. You won’t receive a default unless you fall 60 days behind on a debt worth more than $150. But that’s not to say your repayment schedule won’t impact your credit file. If you continuously miss the minimum repayments on your existing accounts, a creditor may be reluctant to offer you another loan.
How can you check your credit file?
Whether you are in debt or not, it is a good idea to check your credit file regularly. You can access a free copy of your credit file by visiting Veda Advantage. By following these steps, your credit file will be mailed to you within 10 working days.
You will then have a list of all your creditors, debts and financial information. This will help you to get a better idea of where you stand concerning your debt. It will also give you the opportunity to pay any (affordable) unpaid debts or dispute a default.
Paying the default
If you are able, you should pay the defaulted debt. Paying the debt won’t remove the default from your credit file. But your creditor must mark the debt as paid. Some creditors may agree to lend you money if your defaults are paid, but this is something you need to bring up with your creditor.
Contrary to what some credit repair companies might have you believe, the only way to remove a default from your credit file is to wait. You can not pay to have a default removed. If it is there rightfully, you must wait 5 years until it drops off your file. You need to give your credit file time to recover and a default will usually drop off after 5 years.
Disputing the default
If you believe the default has been wrongly applied to your credit file, you can dispute the default. If you choose to dispute a default, the dispute will also be marked on your credit file until the default is removed.
To dispute a default, you must complain to the creditor. A creditor will give you 28 days notice before a default is applied. This is the best time to dispute the default as you may be able to prevent it from being applied.
If you aren’t satisfied with the outcome of the dispute with your creditor, you may complain to the relevant industry ombudsman scheme.
Credit repair companies
Many credit repair companies operating in Australia promise to ‘clean up your credit file’, ‘improve your credit score’, and even ‘remove defaults’ to help you get a loan. But what they offer, you can do yourself for free.
The only way to remove a default is to wait 5 years for it to drop of your file. While you are waiting, you must do all you can to pay your bills and debts on time, always make the minimum repayment, avoid excessive credit enquiries and manage your money correctly. This will improve your credit score, so once the default has dropped off, you will be in a position to borrow again.
If a default has been wrongly applied, you can dispute it yourself by complaining to the creditor. If needs be, you can elevate the matter to the industry ombudsman. If a credit repair company is promising to remove all your defaults, tread carefully because there is actually very little they can do.
All credit repair companies charge fees for their services. Speak to a free financial counsellor before you proceed to ensure they can accomplish what they have promised you.
Tips to improve your credit file
Make your Repayments
Always make the minimum repayment of your debts on or before the due date. By maintaining your debts you will prove you can manage your money correctly and won’t be a risk to you creditors. If you can’ make a repayment, call your creditor immediately and arrange an extension or organise a repayment plan.
Limiting your Enquiries
Each time you enquire after a loan it is marked on your credit score, regardless of if you even proceed with the application. Multiple enquiries can reflect badly on your score.
Use a Broker
A loan broker will do all the hard work for you and it will keep those excessive enquires off your credit rating.
Avoid Payday loans
You can easily fall into a debt trap using payday loans. Avoid them if you can. Some alternative options would be government assistance, such as the No Interest Loan Scheme or bond assistance, a non-conforming loan or a Credit Card with an interest-free period.
Get Affordable Loans
In order to rebuild your credit score you need to prove you are capable of servicing a debt. The best way to do this is to apply for a small affordable loan and maintain the repayments over time.