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A bad credit score? A simple guide on how to improve it

Bad credit score? A simple guide for improvement

Migration Image 24 Mobile.jpgHaving a bad credit score can cause a lot of stress, and it may even prevent you from securing credit. Understanding how your credit score works and what causes it to decrease is the first step to getting your score back on track.

In this guide, we’ll walk you through why your credit score is important, what causes it to decrease, and how you can get it back on track.   

Your credit score is a rating you receive from a credit reporting agency, and is a way of measuring your risk level when it comes to credit. Another term you may be familiar with is a credit report, which is used to calculate your credit score and contains a history of all the credit you’ve had.

Why do you need a credit score?

Why do credit scores matter? Well, if you’re applying for products such as a personal loan or credit card, one of the factors that lenders or providers will assess during your application is your credit score. If you have a bad or low credit score, you may be considered riskier to lend to. This could result in your application being rejected, or you may be unable to negotiate a better rate.

Not having a credit score can also make applying for loans and credit difficult. If you are looking at opening your first credit card and establishing your credit, check out one of our other guides here.

What is a bad credit score?

Credit scores can be calculated by a variety of different credit reporting agencies, all of which have their own methods of categorising scores. Generally though, reporting agencies will categorise credit using categories such as below average, average/fair, good, very good, and excellent.

Two of the major credit reporting bureaus in Australia are Equifax and Experian, both of which categorise credit scores in the above way, although Equifax uses a 1200 point scale while Experian uses a 1000 point scale. Both calculate your credit score by analysing your history and using it to predict how likely you are to experience an adverse event in the near future.

The lower your credit score, the likelier you are to experience an adverse event. This makes you a riskier applicant, which is why you may not be able to negotiate for more favourable terms on your loan, or your application may even be rejected.

What factors can decrease your credit score?

Your credit score can be affected by a variety of different factors. We’ll run through a couple of the more common ways your credit score can decrease:

Poor repayment history

Your repayment history can have a big effect on your credit score. Any repayments you miss or default on are added to your credit record, which can then be seen by lenders and providers. Late repayments and court judgements may also be added to your record. These may remain on your credit record for a significant period of time, which is why creating a good repayment habit or automating your payments is crucial.  

This applies to repayments such as your mortgage or other loan repayments, credit card repayments, utilities, and your phone bill.

Theft and stolen identity

Being a victim of theft of stolen identity can also lead to a decrease in your credit score. If someone steals your card or gets access to your personal information, they may be able to take out loans or open credit cards in your name, which could affect your credit score.

Regularly checking your statements can help you identify unusual transactions, and determine if you may have been a victim of identity theft.

Too many debts

Having a lot of debts can decrease your credit score, as they increase your repayments which is seen as risky by lenders. In addition, the types of debts you accrue may also decrease your score further. For example, payday loans and buy now pay later services are considered risky by lenders and credit reporting agencies, so your score can dip even further if you accumulate these debts.

Multiple credit applications

Whenever you apply for credit, your credit score may decrease slightly. This is normal, and if you have a solid repayment history this dip in your score should correct itself quickly. However, making multiple credit applications in a short amount of time can have a more adverse effect. When a lender accesses your credit record, this is known as a hard enquiry. Getting multiple hard enquiries can negatively affect your credit score, as lenders may get the impression that you are struggling to get credit and consider you high risk, which could affect your application.


Similarly, refinancing can also cause a temporary dip in your credit score which should correct itself once you start regular repaying your loan. However, just like when making multiple credit applications, if you apply to multiple lenders over a short period of time it may be seen as desperation.

Six tips to improve your credit score

Nothing is set in stone. If you are struggling with bad credit, there are strategies you can use to manage your debts and increase your score.

Debt consolidation

If you have multiple debts, consolidating them into one manageable loan may be worthwhile. Debt consolidation is the process where you take out a personal loan instead of paying off multiple different debts. As we mentioned earlier, the types of debt you have can have a big effect on your score. Consolidating your payday loan debt into a personal loan reduces the amount of risky obligations on your credit report, and may help increase your credit score over time.

The benefit to debt consolidation is that you’ll have one interest rate and repayment schedule, so you won’t have to juggle multiple different debts. Be sure to talk to a lender to figure out if this is the right step for you. If you do consolidate, don’t forget to close the cards and accounts you’ll no longer use.

Reduce credit card limits

The key to improving your credit score is to become less risky. One way to do this is to reduce the limit on your credit card. This lowers your risk, as your payments may become more manageable. The risk with reducing your card limit is that if you have an unexpected expense, you may go over your limit and have to pay additional fees.

Automate repayments

One of the best ways of getting your credit score back on track is to pay your bills and other repayments on time. If this is something you struggle with, automating your repayments may be a good solution. Since Comprehensive Credit Reporting was introduced, your credit record will show all your repayments, not only your defaults or missed repayments. Because of this, repaying regularly and on time can increase your credit score, so its definitely worth doing.  

Reduce credit and loan applications

Reducing the amount of credit applications you make is another step in the right direction. There’s no harm in shopping around, but make sure you have all the information you need before proceeding with an application. Doing your research can help you rule out certain lenders or products, resulting in less hard enquiries into your credit report.

Pay off loans

While its easier said than done, paying off your loans is pretty important. One strategy is paying off loans with higher interest first, or some people prefer paying off their smaller loans first and build up to their larger loans. If you are struggling to pay off your loans and debts reach out to your lender, as they may be able to work with you and create a payment plan.

Fix credit file errors

Make sure that the information you’ve given to your lenders and creditors is correct, as errors can affect your score. If you change names or addresses make sure to inform them as soon as possible, as they may send your bills or statements to the wrong address, which could lead to you missing payments.


This article is intended to provide general information of an educational nature only. Information in this article is current as at the date of publication.

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