A shaky history of paying bills on time or skipping a few debt repayments may seem like minor issues, but money habits from the past can come back to haunt us.
Some Australians can save for years to grow a home deposit only to be knocked back for a loan because of a bad credit rating. The trouble is, plenty of people are in the dark about how credit ratings work and the impact they can have.
Whenever you apply for a loan, credit card or even a new utilities connection, the lender or service provider will check out your credit history. It’s a record that shows how well you have managed debt in the past - in fact, you’ll have a credit file if you’ve applied for a loan, store card, or even a mobile phone plan in the last five years.
These records are kept by credit bureaus like Dun & Bradstreet and Veda, and your financial history is used to develop a personal credit score, which gives lenders an idea of the sort of risk you represent as a borrower.
According to research by comparison site Finder, one in four Australians worry their credit score could stop them getting a loan. And yes, it could. But here’s the rub. Credit scores take into account years of past behaviour, and overdue debts that may seem long forgotten can stay on your credit file for up to seven years.
Having a tarnished credit record can be costly. It may mean the only lenders willing to take you on are those that deal with high-risk borrowers in return for higher than normal interest charges.
That’s why it pays to take good care of your credit record. The easiest way to do this is by paying bills and debt repayments on time, every time. If you can’t make a repayment, get in touch with your lender to explain the situation. Early action can minimise the fallout on your credit record.
There is another good reason to keep tabs on your credit record. Each time an application for credit is made in your name it will appear your file, so it can alert you to any fraudulent loan applications made using your personal identity.
To know how your credit history rates, take a look at Finder’s free credit score check or request a full copy of your credit report by heading to Veda’s website. Consumers are entitled to one free report annually.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Paying off debt
Check out our education module on how to take control of debt. It will provide you with some general information about minimising the costs associated with borrowed funds.
Getting on top of your finances doesn’t have to be a tough exercise if you tackle it in steps.