Bad Credit; the Causes and Consequences

Most Australians know bad credit is not a good thing but few really know the consequences of bad credit or what causes it.

The Consequences

Practically everyone knows that bad credit can virtually ruin a person’s financial life. If a consumer has not experienced it, they probably have a relative or friend who constantly discusses the misfortune of bad credit. With bad credit consumers will find it practically impossible to arrange a personal loan, a mortgage, a credit card or any other form of borrowing. This could be detrimental, especially in times of emergency.

Unfortunately, many consumers do not realize the circumstances that they are in until they apply for a loan, only to be rejected. Lenders thoroughly check an applicant’s credit file after every request for a loan. Everything is scrutinized, including bill payments over the last five years, to assess what risk is posed to the lender. If a lender deems that there is too much risk, and that the likelihood of repayment is relatively small, they will reject the application for a loan or credit card.

The causes of bad credit

Missed (or late) payments: A missed or late payment is the primary indicator that a borrower may pose a risk to a lender. Missed or late payments will decrease a consumer’s credit rating faster than anything else, but this does not apply strictly to credit cards. Missed or late payments of any form, ranging from credit card payments to mobile phone bills, will hinder an applicant’s credit report.  A cautious consumer should activate direct payments for loans and bills to avoid this problem, and to create a sturdy credit file. It is not too late to start even if the applicant has defaulted in the past. Creditors will notice a change in the consumer’s repayment schedule in this case, which will be rewarded.

Errors: Consumers may be surprised to know how frequently errors prevent may them from acquiring the capital they need. Credit report errors and inaccuracies are fairly common, especially with scammers and thieves prowling for new victims. Much of the time a consumer’s identity or card information has been breached without the slightest knowledge of the consumer.  Consequently, the scammers open up additional accounts in the victim’s name and charge them up without making a single repayment.  To prevent this from occurring consumers must be diligent with their personal information and periodically check their own credit files. The credit reporting agencies will provide a free credit report and it should be assessed for any errors. If any errors are discovered, the lenders should be contacted to amend the issue.