Having bad credit doesn’t affect your day-to-day life until something big comes up. Your lease has expired; you’re having another baby and need a bigger place; your car has given up the ghost and it’s time for a new one. When these major life events inevitably come up, your bad credit can hamstring you in more ways than one. Here are five things that are hard to do with bad credit. First, let’s explain bad credit.
Bad credit defined
Everyone who’s ever used credit cards or loans or even bought a mobile phone on a plan has a credit history. This history records your applications for credit, what credit products you currently have, whether you’ve ever defaulted, i.e. or not paid a bill or loan back, or have court orders regarding debts such as a Part IX Debt Agreement or bankruptcy.
Your history is held by credit reporting bureaus. Banks and lenders – anyone who might give you credit – use this to determine your creditworthiness.
Creditworthiness is an assessment of your ability to pay back a loan on time and in full based on your past behaviour. Low creditworthiness means higher risks for banks and lenders which means they may be more reluctant to approve you as part of their responsible lending practices.
Also, most credit reporting bureaus give you a score out of 1200 (sometimes 1000) to give you an insight into your creditworthiness. If you have a “below average” score, this indicates you are a risky borrower and you may be refused credit.
Getting a rental application approved
If you have bad credit, you may find it difficult to get approved for rental properties, even if you can demonstrate you have the means to pay rent now. Credit histories tell people who extend credit your past situation but also the likelihood you will have a negative financial event in the future. Any negative financial event means you may not be able to pay rent, so a landlord may be wary of renting out their property to someone who potentially fall behind.
According to the Tenants Union of Victoria, agents or landlords can gain information about your credit history through Public Record Information (Levebvre 2017) and can base their decisions on this information. This is also known as a “soft” credit check.
Finding a reasonable interest rate
Interest rates, as we’ve explained in our blog on having good credit scores, can depend on your credit score. High credit scores mean lower risk for lenders, which is rewarded with lower interest rates. If you have bad credit, you are a higher risk and lenders must have some kind of “insurance” against defaults. This is given in the form of higher interest rates. These interest rates are sometimes known as “sub-prime” rates which are significantly higher than “prime” rates given to good credit customers (Kagan, 2018). You may get approved; but your repayments will be significantly higher than normal.
Getting a mobile phone on a plan
According to a Deloitte Australia survey, mobile phone use in Australia sits at 91 percent (Corbett et. al., 2019). Since mobile phone plans are a form of credit – a service provider gives you a phone now and trusts you to pay off the handset over the lifetime of a contract, much like a car loan – a telco will conduct a hard credit check on you to determine your creditworthiness.
If you have bad credit, it’s likely they will refuse to offer a handset contract. This means either holding on to a phone you already have for a bit longer; or if you haven’t got a phone, buying a less powerful featurephone or “dumbphone” that only makes and receives calls or SMS’s.
Getting full-time employment
In Australia, prospective employers can check your credit history using the publicly available information to determine if you are a risky hire. “Soft” credit checks like these are common in law enforcement, government public service, and of course, in the financial services sector. Applying for credit too often, having defaults, or bankruptcy on your report can show employers that you are not good with money, or at the least an untrustworthy or irresponsible employee.
Purchasing a car on finance
Much like finding favourable interest rates, purchasing a vehicle with bad credit can prove difficult. Lenders and financiers will more than likely refuse to give someone a car with bad credit, as they are too high a risk of default. If a telco will not give you a phone, a dealer will refuse to give you a car – something 10 to 20 times more expensive!
In order to get approved, you may have to find a guarantor. A guarantor is someone with good credit that “guarantees” you will pay the loan back; but is also on the hook if you default. This can be extremely hard in and of itself. Even so, you’ll be subject to the same high interest rates until you can correct your credit over time.
Bad credit doesn’t last forever
If you have bad credit and are trying to correct it, remember that your credit history only dates to the past seven years. With new comprehensive credit reporting rules, your credit score may improve even faster within that period. For more help, consider consulting a financial professional to talk about your options.
Disclaimer: This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.