What is a Bad Credit Score?

A credit score is essentially a three-digital number that can range from anywhere between 300 to 850. Lenders consider individuals with higher scores as lower risk and individuals with lower scores as higher risk. There can be different scoring models used to calculate scores from your credit report and these scores are then shared with lenders when you apply for credit.

But no matter which credit bureau and scoring model computes your score, the conclusion always stays the same -- A bad credit score can severely impact your report and make it difficult for you to get approved for new credit applications.

While the exact range for a bad credit score in Australia can depend on the credit scoring model, usually a score between the range of 300-550 is considered a bad credit score.

Understanding credit score bands better can help you analyse what you can do to improve your score. See your free credit score today and get started.

Credit scores are usually divided into different credit score bands or categories to make it easier for lenders to come to a decision about how likely you are to repay loans on time.

As stated above, different credit bureaus may have different scoring models and how is your credit score calculated may also differ, but this is what the most common credit score range looks like:

Poor credit score (300-549): Individuals within this range are categorised as ones with poor credit scores. This can be due to a wide range of factors including missed payments like credit card payments and EMI payments. A large number of credit inquiries in a short span of time and poor credit utilisation can also lead to a poor credit score and turn you into a high-risk applicant who is more likely to default on their loan. All of this combined can make it very difficult to get approved for credit.

Fair credit score (500-649): Late or irregular credit card bill payments and EMI payments can get you stuck in a fair credit score range. While you are still considered a risk by lenders, you are still more likely to get approved for some credit applications. But you may have to deal with high interest rates and down payments.

Good credit score (650-749): When you have considerably good and regular repayment behaviour in the past, you get a good credit score. You are considered to be at low risk of defaulting. It is more likely for you to get approved for credit applications while getting good deals.

Very good credit score (750-799): A long credit history, regular credit payments, and a responsible repayment history leads to a very good credit score. You are considered a low risk for lenders and you are likely to get approved for credit applications with good offers.

Excellent credit score (800-900): People that have low credit utilisation, good financial management, regular credit repayments, and good credit history have an excellent credit score. They are considered very low risk by lenders. They are also more likely to receive the best offers, favourable terms, and interest rates for credit applications.

While a bad credit score can have many consequences, it is important to remember that it is not permanent. By understanding what has been affecting your score and what is keeping it low, you can make subsequent improvements to your key financial habits and go higher up on the credit band range.

Your credit score is a product of various factors in your credit report such as late payments, charged-off accounts, bankruptcies and serious infringements that can stay on your report for over seven years.

Other factors such as a notice of court judgment (money order), summons, and overdue accounts listed as clear-outs usually take five years to get removed. Furthermore, repayment history and hard credit inquiries can stay on your report for up to two years.

Generally, if you pay off an outstanding bill, it remains on your credit report for another five or seven years (depending on the type of overdue debt).

Under Comprehensive Credit Reporting (CCR) or Positive Credit Reporting in Australia, the credit file also reflects positive behaviours that can subsequently improve the score in addition to the negative information that might be taking down your score. This in turn means that the effect of bad credit scores in Australia can be offset by regular positive financial behaviour.

While your bad credit score can stay on your report for a year or two, you can improve it, as long as you take steps to improve your score.

Bad repayment history

If you default on your loan or credit repayments often, it can start piling up quickly on your credit report as bad payment history which can in turn affect your credit score severely. The more unpaid repayments you have, the lower your credit score will be.

Short credit history

When you don’t have a considerably long credit history, your credit score will be invariably low since the lenders do not know what kind of candidate you are. To build your credit history, you can take out short-term credit cards or loans and make sure to pay your bills on time.

Poor credit utilisation limit

The amount of credit you have used compared to how much credit limit you have available is called the credit utilisation ratio. If you are consistently using almost all of your credit limit, it is seen as a bad sign and it can affect your credit score. Ideally, you should always leave about 30% of the credit limit unused.

Multiple hard inquiries

When you apply for too many loans and credit applications in a small span of time, it can add multiple hard inquiries to your credit report, which can in turn impact your credit score. Instead, it is recommended that you wait for a few months before applying for a new credit line if you have faced a few application rejections recently.

Higher than usual interest rates

A lower credit score means that lenders see you as a risky candidate to extend credit and because of that they will most likely charge a higher interest rate if they end up approving your credit application. This can significantly increase your borrowing costs and affect your finances.

Reject of loan and credit applications

When lenders assess credit applications, they see a low credit score as a mark of lower creditworthiness. Therefore, your applications can get subjected to more rejections. In many cases, you may not even meet the minimum requirements set by the lender for the given credit product and face an instant rejection.

Difficulty in renting

A bad credit score can also hinder your ability to rent a place. Landlords often run a credit check to see if you can keep up with regular rental payments on time or not. They are especially suspicious of applicants that might have a history of late payments, bankruptcy, or foreclosures. In case your credit score is too low, you may lose your chance to rent out the place that you want.

Opening utility accounts

Your credit score also gets reviewed by utility companies when you try to open a new account. If you have bad credit scores, it may create a big roadblock in the process. In some cases, utility companies may even ask for a large refundable deposit.

Paying higher premiums

Many auto insurance companies may charge you for a higher premium than others if you don’t have a good payment history and outstanding debts.

1 - Pay off your old debt

Before you do anything, you need to pay off your outstanding debt and settle accounts. You should check your credit report to see if there are any outstanding amounts or partially paid amounts that need to be written off.

When you don’t pay your debt, more interest piles up over the principal amount and it also severely affects your credit score. On the other hand, paying off your debt can significantly boost your score.

2 - Apply for your short term loans

Instead of applying for bigger loans, for which you may get rejected since you already have a bad credit score, you can apply for short term loans and repay them on a regular basis to improve your score. The interest rate might be high but by opting for a small loan and not missing on any monthly payments, you can make sure you don’t accrue a lot of interest.

3 - Never miss your payments

Payment history is undeniably one of the biggest factors that will influence your score. And to keep a good payment history, you need to be consistent with bill payments. Not only will this improve your score but it will also help you avoid late payment fees or huge interest.

One of the ways you can ensure you don’t miss out on payments is by setting autopay mechanisms for recurring bills such as student loans or utility bills.

In case you’re facing financial issues, you can also reach out to your credit provider for easier repayment options. You can also go about adjusting due dates if all your payments are due on the same day of the month and making it more difficult to pay them on time.

4 - Check your credit report regularly

Always keep a close tab on the major factors in your report that are responsible for bringing down your score. In addition, keep an eye on errors such as hard inquiries that you did not approve of, or some other form or inaccurate debt amounts you see. If there are any such errors, you should dispute the errors and get them taken off of your credit file to quickly improve your credit score.

5 - Avoid applying for multiple credit products together

If you apply for multiple loans or credit cards at the same time, it can in turn generate multiple hard inquiries on your credit report. This can directly affect your credit scores. Also, when lenders check your credit report to determine your creditworthiness, they will also be able to see that you have been applying for several credit products and possibly stretching yourself thin.

Ideally, if you get rejected for a credit product, you should wait for over 14-45 days before applying again.

Remember that even if you have a less than ideal credit score right now, it's not a permanent number that will forever haunt you and make it difficult for you to get a new line of credit. It is possible to improve your credit score and become an ideal candidate. All you have to do is follow the right steps consistently and avoid making any finance faux pas.

At ClearScore, we make it easy for you to track your credit score regularly. Sign up to check your credit report today.