Rebuilding Your Credit Score After Financial Setbacks: A Practical Guide

At some point in our lives, most of us have had money problems. It may have resulted from being unexpectedly made redundant, business sales temporarily tanking, or surprise expenses that knocked your budget sideways.

If you have a financial buffer in place, you can often ride out these storms until things pick up. However, if you don’t and you start to miss payments on rent or your mortgage, utility services, or your credit card, it could start to impact your credit score. Over time, this can make it harder for you to get approved for a loan if you ever need one.

The good news is that having a low credit score is not a permanent slight. Rather, it simply reflects what has happened to you in the past and not how you will always be perceived. Indeed, it is perfectly possible to rebuild your creditworthiness and get you back onto a good financial footing.

Here’s how you can rebuild your credit score after a financial setback.

What is a Credit Score?

A credit score is a number that represents your creditworthiness based on your financial history. It can be between 0 and 1000 or 1200, depending on which credit bureau is assessing it. The main ones are Equifax, Experian, and Illion.

This number helps lenders assess the risk of lending you money. It also influences your ability to get home, personal,l or car loans, credit cards, and favourable interest rates. (That said, through some companies, it is still possible to get car loans with a poor credit score.)

The score is based on your previous repayment history for credit cards, loans, and utility bills. It also takes into account your credit limits, any credit applications you have made, and negative events like bankruptcy or court judgments.

The higher your credit score, the better, as it indicates you are in a lower-risk category for lending. Both Experian and Illion typically consider scores of over 800 to be excellent. For Equifax, that figure is nearer to 853.

At the other end of the scale, anything under 500 is considered below average. When you go below 400, it starts to approach poor credit score territory.

What Causes a Credit Score to Drop?

According to various reports, between 10% and 21% of Australians have below-average credit scores. In the majority of these cases, this is likely due to repayments regularly being late or missed.

Even one late payment can show up on your credit report, and if bills go unpaid for longer, a default can be listed. Additionally, debts sent to collectors can also appear on your credit history. Sometimes this is due to people experiencing a period of financial hardship, such as losing income. 

Being declared bankrupt will also be recorded on your credit report, and therefore, lower your score. As can be applying for too many loans in a short space of time.

Thankfully, if you do have a low credit score, once you understand what might have caused it, you’ll at least know what exactly needs fixing.

How To Rebuild Your Credit Score?

You can request a free credit check in Australia every three months from one of the aforementioned major credit reporting bodies. Or online providers like Credit Savvy and ClearScore. The process will require you to provide them with personal details for a 100-point identity check. This can include a driver’s licence, passport, or Medicare card. 

Should your credit score come back as being below average or poor, don’t worry. Here are three steps you can take to improve it.

Check Your Credit Report for Errors

Before you do anything else, review your individual credit report carefully. Be sure to check your personal details and that every account listed actually belongs to you. Additionally, comb through your repayment history and confirm it matches your bank statements. Sometimes repayments are marked as late even though they were made on time.

If something is wrong, you can formally request a correction to your credit file. This is one of the simplest credit repair strategies available to you because simply fixing an error can lift your score without you having to do anything else.

Reduce Your Levels of Debt and Make Consistent, On-time Repayments

Your previous repayment history is very influential on your credit score. That is because lenders want to see consistency and proof that you can manage money responsibly.

If your repayment history has been a bit sketchy, you can start addressing it by paying all your bills on time. A good way to do this is to set up automatic payments to go out on the day after you get paid. Doing this will remove the risk of you forgetting to make the payments or spending the money you would otherwise allocate to them.

Should you have one or more credit cards, focus on reducing your balances as quickly as possible. Avoid adding to the owed balances by making new purchases on them. Whenever you can, it is also a good idea to lower your borrowing limit.

If the repayments are getting on top of you, talk to your lender. Many will offer hardship options and a debt management plan that can help you reorganise them into something manageable.

Don’t Make These Common Mistakes

When your score is low, you can feel like you need to come up with a quick solution. This could be anything from gambling to applying for multiple loans.

These types of solutions are often poorly thought out and can lead you to make rash decisions that plunge you deeper into financial trouble. For instance, if you lose money on betting, you’ll have even less to cover your repayments. Additionally, every credit application (whether successful or not) will add another enquiry to your credit report. A better tactic would be to build good financial habits, such as spending less, saving and investing more, and paying your bills on time.

Disclaimer:

The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.