When you apply for credit the bank looks at your character. Character is determined by the way you manage your accounts and pay your debts. They actually look at your bank statements!!
Your character is then rated in the form of a Credit Score – good or bad. From the moment that you open a credit account of any sort – phone, power, credit card or a loan – you will be creating a credit score, so we all have one whether we know about it or not! These scores affect our ability to get loans or the interest rate we pay for debt.
It’s a good idea to get your credit score looking good before applying to lenders for finance. Generally, if you have been keeping on top of your credit card payments, paying your bills on time, and spending within your account limits your credit score will look fine.
So, what if that’s not the case? “Bad” account behaviour such as going over your account limits, not making minimum credit card payments, not paying a phone bill on time… it all stacks up against you.
Don’t panic though, it is possible to claw your way back up the credit score ratings! Making a plan to get back on track is the first step. Look at your spending plan (also known as a budget!). Making regular payments on your debt is a must. Even if you are not able to pay it all off immediately, regular small payments will show the prospective lender that you are taking steps and getting your finances in order.
Basically, you need to plan ahead and manage your finances. Banks need to see that you can change your account behaviour before they will be willing to lend to you.
There are a number of organisations that collect credit information. Lenders will check your credit history when you apply for credit such as a personal loan, car finance, a new credit card, or a mortgage. Sometimes a prospective landlord or insurer may even check.
One thing to take into account is that the more often you have credit checks done, the more hesitant that will make prospective lenders! It makes it look like you are taking on a lot of debt, which is a red flag for a lender. For example, if you get a credit card application, and a car loan and then a personal loan, the home loan lender may get very nervous.
If you find yourself with a debt that has gone to debt collection, it can take 5 years for this record to come off your credit record. This does not mean you can’t get further credit for 5 years, but it may limit the amount and where you can get credit. Debts get sent to debt collection for lots of reasons and not all are show stoppers.
If you are worried about your credit score affecting your ability to get a loan the best thing you can do is make sure that there is proof that you can make regular payments on your debts.