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Module 2: True costs of bad credit

“Success is nothing more than a simple few disciplines practiced every day.” 

Jim Rohn

Introduction 

Imagine that a financial mistake could cost you extra money for the next 30 years…! That’s your reality if you are signing your mortgage contract off with bad credit. If you have a good credit score, your interest can be as low as 2.8%, while bad credit can raise it up to 4.8%. What doesn’t sound like a big difference on paper can cost you an additional $163,683 (not including fees). Shocking, right?! Knowing the true costs of bad credit could help you make smarter decisions in the future and build up your credit score over time. 

It’s important to understand that your credit score doesn’t just affect your credit applications. Your credit score affects multiple other areas in your life. A low credit score makes it harder for you to rent an apartment and may require you to put down a security deposit before getting approved for a new utility contract. 

However, having a bad credit score doesn’t say anything about you as a person. A mistake from the past doesn’t need to affect your financial future for longer than necessary. With the right strategy in place, you could improve your credit score over time and unlock better opportunities for yourself. 

What is considered bad credit?

Alright, real talk: having a bad credit score is not the end of the word. It simply means that a credit provider will think of you as a riskier borrower, it’s not a statement about you as a person. However, it can affect your ability to apply for credit and make it a little more difficult to get your application accepted. But what is a bad credit score in the first place? 

What’s considered a bad credit score depends on the type of loan you are applying for and which credit bureau you ask. For example, anything below 300 is considered a low score on the Equifax scale. If that’s what your credit score currently looks like, don’t feel discouraged. A low credit score won’t mean you don’t have a chance to apply for credit at all. Credit providers know that one mistake in the past doesn’t necessarily reflect your current ability to repay a loan, so there are options available to you. 

There are a number of reasons why you might have a bad credit score:

  • Missed payments 

Missed or late payments can negatively impact your credit scores. Especially, if you forget to pay your bills more frequently, your credit score will go down and credit providers will see you as a more risky candidate. 

  • Too many credit enquiries 

If you have applied for credit with multiple credit providers in a short period of time, your credit score may see the effects. 

  • Defaults

Any overdue accounts that are listed as defaults will leave a black mark on your credit score. They stay on your report for 5 years before they disappear. Overdue accounts listed as a serious credit infringement will stay on your report for 7 years.

  • Judgements & bankruptcies

Legal matters linked to debt stay on your credit score for up to 7 years and can seriously harm your credit score.

  • Clear-outs and serious credit infringements

If a credit provider, such as a bank, utility provider, lender, etc. tried to get in touch with you multiple times but communication fails, this can leave a bad mark on your credit score. Equally, serious credit infringements stain your reputation and can stay on your report for 7 years. 

What’s affected by bad credit? 

Most people know that a bad credit score can affect their ability to apply for finance. However, there are many other areas in your life that can be affected by your credit score without you even knowing. 

Loan applications 

This one is a no-brainer. When you apply for a loan, your credit provider will look at your credit score to assess if you are creditworthy. A low credit score can mean a provider of credit won’t offer you a good deal or even reject your application as too risky. 

Having a low credit score may not mean you don’t have access to credit at all but it may mean that you won’t have the same opportunities as someone with the same income but a better credit score. A better credit score means easy access to better interest rates and longer loan terms. Therefore, a low credit score could cost you more money in the long run. 

Renting 

When thinking about credit scores, renting might not be the first thing that comes to mind. Not every rental agency will check your credit score, but they might. Your credit report can be taken as an indicator to assess how likely you are to pay rent on time. If you have a bad credit score, it could be harder to get your rental application accepted. 

If you don’t have a credit history at all or bad credit, a solid proof of income and a letter of recommendation from old landlords can go a long way. 

Utility applications

This might be another unexpected one: most utility providers will perform a credit check when you first set up an account with them to assess how likely you are to pay your bills on time. Having a low to average credit score probably won’t cause problems. Often, utility providers are not necessarily fussy and if your credit score doesn’t look too great, they may simply ask you to put down a safety deposit to provide security against missed payments. 

Short-term finance (e.g. phone)

This type of finance is often used to purchase electronics like mobile phones or white goods and is often interest-free. It’s a great way to space out payments if you don’t want to pay the full amount at once. However, if your credit score isn’t looking too great, this option may not be available to you. In some cases, you may be able to apply for Government assistance instead if you need to make a big purchase. 

Tippla is a tool that helps Australians to access and understand their credit scores. We are not financial advisors. We work with a range of industry professionals and compliance check our content to ensure factual accuracy. We do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information in this lesson relates to your unique circumstances.

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