Applying For A Personal Loan? Check Your Credit!

February 18, 2021

Thinking of applying for a personal loan? There’s one important thing you need to do before you go any further. Check. Your. Credit.

A woman smiling as she types into her laptop

No matter what stage of the process you’re at – whether you’re working out how much you can afford to borrow, comparing loans and lenders, gathering your documents, or you are literally just about to apply – you need to pause what you’re doing and take time to check your credit report.

Your credit report holds a wealth of information about you, detailing how you have dealt with credit in the past – and how you are handling it currently. This makes it essential reading for potential lenders, and as a result, essential reading for you.

All too often, people apply for credit without checking their credit report first. This isn’t a great idea for a number of reasons. As an example, your credit report may contain errors that need to be fixed, or your credit score might be lower than you thought because of a few late – and now forgotten – repayments.

The point is, if you don’t check your credit, you won’t know what it says about you. But your lender will.

When you apply, your lender will use the information within your credit report to determine the outcome of your application. If you have sketchy credit, your application could be rejected – or you may have to pay a much higher interest rate on your loan.

So then, what do you need to know? In this post, we’re going to cover all the essentials regarding your credit report and how it relates to your personal loan. From how to check your credit and what’s in your credit report, to how you can use your personal loan to build your credit over time.

What’s In Your Credit Report?

Credit providers are bound by law to report any dealings they have with you to the credit reporting agencies. This information is added to your credit report to allow potential lenders and other credit providers to assess your creditworthiness in the future. Thanks to Australia’s Comprehensive Credit Reporting (CCR) system, both the good and the bad are recorded.

Okay, so what’s in your credit report? First up, your credit report will detail your personal information. This will likely include your full name, your date of birth, your address and your driver’s licence number. Moving on from that, it will list the following.

  • Credit Accounts: For each credit product you have held in the past two years, it will provide information regarding the type of credit product (such as a personal loan or credit card), the credit provider and the credit limit. It may also include the opening and closing dates of the account, and the joint applicant’s name, if the account is held jointly.
  • Repayment History: For each credit product, the report will provide repayment history info. This may include the repayment amount, repayment frequency, and how often repayments have been made on time. It will also detail missed payments (payments not made within 14 days of the due date), and if and when they were made.
  • Credit Applications & Enquiries: Within this section, the report provides a list of all credit enquiries or applications made in your name. This may include requests for your credit report made by credit providers, and any credit applications you’ve made.
  • Defaults: If you have failed to make a payment to a credit provider on a loan, credit card, utility bill or phone bill, this may be listed in your credit report as a default. Reports on defaults can be made when the amount owed is $150 or more, and more than 60 days overdue. A default will remain on your credit report for five years, or seven years in the case of a clearout. If you pay the debt, the default will remain on your credit report, but will be marked as paid.
  • Credit Infringements: If you have any bankruptcies or debt agreements, court judgments, or personal insolvency agreements in your name, it will be noted in your credit report.

The items detailed within your credit report will only be held there for a certain amount of time. This allows you to rebuild your credit as negative items fall away over time, and as you work on adding positive information. More on improving your credit later.

Credit Report vs. Credit File

For those who are unfamiliar with credit reporting, the terms used can often be confusing. One common query we come across regards the difference between credit reports and credit scores. Well then, since we’ve covered credit reports – what exactly is a credit score?

As a numerical representation of your credit report, your credit score is basically a snapshot of your creditworthiness. As such, it can give you – and potential credit providers – a rough idea of how you handle credit.

So, how is it calculated? While each credit reporting agency calculates credit scores slightly differently, the process involves taking each piece of information held within your credit report, and giving it a weighting. Lots of positive information will make for a higher credit score, while negative information will drag that score down.

As you might expect then, your credit score is not static. It changes over time, according to the information held within your credit report. Keep on making your repayments on time and it should go up. Miss a repayment and it will go down.

Depending on the credit reporting agency, your credit score will either range between zero and 1,000, or zero and 1,200. With each agency creating a ratings scale – typically below average, average, good, very good and excellent – this makes it easy to see where each credit score sits on that scale.

What Happens When You Apply For A Personal Loan

With a better understanding of how credit reporting works, we can now go on to explain what happens when you apply for a loan – and what part your credit report plays.

First, though, let’s have a quick look at the difference between a ‘soft’ and ‘hard’ credit enquiry.

  • Soft Enquiries: Credit providers can carry out a soft enquiry to check your credit, without it affecting your credit score. They might do this when extending pre-approval to you, or to provide you with an indicative interest rate for a loan before you apply. When you check your credit, this is also a soft enquiry, which means it doesn’t affect your credit.
  • Hard Enquiries: When you apply for credit, the credit provider will fully review your credit report to assess your creditworthiness. This is a hard enquiry and will be recorded on your credit report for up to two years. It may affect your credit score, which is why it’s important to keep credit applications to a minimum – and to only apply for credit when you know you will be approved.

Now to the application process.

  • Before you apply. Some credit providers will do a soft credit check before you apply, allowing you to gauge how much you will pay in interest on your loan. Lenders may also perform a soft credit check to provide you with pre-approval on your loan. If you need to borrow a certain amount, say to buy a car, this pre-approval process can give you the confidence to shop around and buy within a certain price range.
  • When you apply. When you apply for a personal loan, the lender will use the information you provide to assess your suitability for the loan. This will include your employment status, your income, your assets and debts, and your spending. During the application process, the lender will also take time to check over your credit report. This allows the lender to evaluate your creditworthiness.

With this credit check, lenders will use the information to determine two things.

  • To Approve, or Not To Approve

First up, whether or not to approve the application. While the lender will obviously take into account your financial circumstances with regards to whether you can afford the loan, it will also use your credit information to determine whether you are responsible enough to repay it as per the contract.

If your credit report shows lots of defaults or missed payments, the lender may choose to reject the application after deciding it’s too risky to lend to you. If your credit is good, and your credit report shows you always make repayments on time, the lender will be more likely to approve your application as you have proved to be responsible with credit in the past.

  • Your Interest Rate

If the lender decides to approve your application, it will then use your credit information to determine your interest rate. Again, this is all to do with risk. If you have good credit, your low-risk status will be rewarded with a lower interest rate. If your credit isn’t great, the lender will likely apply a higher interest rate to your loan.

How Your Credit Affects Your Personal Loan

Okay, so let’s dig a little deeper into how your credit affects your personal loan.

Type of Loan

You’ve checked your credit and you’re now looking to apply for a loan. If your credit is not so good, you may have to make certain choices to either make the loan more affordable for you or to improve your chances of getting approved.

In terms of the type of personal loan you apply for, you will usually find secured loans offer lower rates than unsecured loans. If your credit is middling, you may find a secured loan that allows you to get a lower rate, creating a more affordable repayment schedule. By placing an asset against the loan, you also lower the risk for the lender, potentially increasing your chances of getting approved.

On the other hand, if you have good credit, you have more options to choose from. You can opt for a secured or unsecured loan, at a fixed or variable rate, knowing that the rate you get should be lower than an applicant with a poorer credit score.

Approval

As we mentioned, your credit will impact your chances of approval. If your credit is bad, you may find it harder to get approved. You may need to apply for a loan from a lender that specialises in bad credit personal loans. While this may give you access to the funds you need, you will likely pay more in fees and interest, making the loan more costly overall.

If your credit is good, you should find it much easier to get approved. Again, this opens up your options to allow you to choose from a wider range of lenders and a wider range of loans. You should be able to choose the type of loan that suits you, with the features you need.

Interest

On approving your loan, the lender will provide you with the interest rate that will be applied to the loan, which will either be variable or fixed over the entire loan term. If your credit is good enough to allow you to get approved, but still not great overall, the interest on your loan will likely be higher than applicants with good credit.

With a higher interest rate, your repayments will also be higher, meaning you have to put aside more each month to cover them. You will pay more back in interest over the life of the loan, making the loan more expensive and harder to pay off.

How To Check Your Credit

Now we’ve covered the importance of your credit – and how it affects not only your application but the personal loan you are approved for – let’s take a look at how you can check your credit so you know where you stand before you apply.

There are a few ways you can check your credit. First up, you could go straight to the credit reporting agencies. There are three main credit reporting agencies in Australia: Experian, Equifax and illion.

  • Experian. Typically, Experian allows you to check your credit by post or online. However, due to COVID, the agency is currently only processing online enquiries. When you apply online, Experian will contact you by email, asking you to provide 100 points of ID and proof of your address. After that has been verified, Experian will email you a copy of your credit report. This is free.
  • Equifax. With Equifax, you can order a free copy of your credit file over the phone, by mail, or online once a year, if you’ve been declined credit in the past 90 days, or if you’ve had an item corrected in your Equifax credit report. Outside of those terms, Equifax offers a paid service.
  • illion. Going through illion, you can see your credit report and credit score online for free, after providing the required identification details for verification.

TIP: If you can, apply for a copy of your credit file from each of the three credit reporting agencies. When you apply for a loan, you don’t know which reporting agency the lender will use to check your credit. And, as each agency may not hold the same information, that means it’s a good idea to check each report to ensure it’s correct.

Aside from going to each credit reporting agency direct, you may also choose to check your credit using a third-party provider. While these services are generally free – avoid services that ask for your credit card details – you are providing them access to sensitive information, so be careful which company you choose, and check how they use your information before you sign up.

Q. Can you fix mistakes in your credit report?

A. Yes, you can. There may be details in your credit report that are incorrect – which is why it’s so important to check each of your credit reports carefully. If you find any errors, contact the reporting agency direct to have them corrected. Each agency has a procedure to follow to do this.

Be wary of companies that offer to ‘clean’ your credit report. While they may make it seem like they can get rid of all negative items on your credit report, they can only apply to have errors corrected. They will likely charge for this service – but, you can easily do it yourself for free.

Q. Can you get approved for a personal loan with bad credit?

A. If, after checking your credit, you find that your credit score is less than awesome, you may still choose to apply for a personal loan. Consider applying for a secured loan if that is an option, and be sure to choose a loan that fits your budget, without causing you financial stress. Check the eligibility requirements carefully, and ask the lender if you are unsure.

By applying through Credit World, we take the pain out of this process. We will carry out a soft credit check before you apply, to then match you with loans and lenders suited to your credit rating. Want to know more? Hit us up with questions at any time.

How To Improve Your Credit

On the other hand, you may decide to hold off on applying, for now, to take time to improve your credit and boost your credit score. So, how do you do that?

Here in Australia, credit reporting agencies now utilise a Comprehensive Credit Reporting system. Where previously only negative items were recorded, now both positive and negative information is used to weigh your credit report. This makes it possible to improve your credit over time by doing more positive actions, and fewer negative ones.

What’s positive and what’s negative, we hear you say?

If you want to improve your credit with positive actions, that could include:

  • Always paying your bills on time. This includes utility bills and bills for your internet and mobile phone.
  • Always make your repayments on time. If you are currently paying off a loan, or if you have a credit card or hire purchase, make sure to always pay these repayments by the due date.
  • Making an effort to build your savings. Try to deposit a certain amount each week into a savings account, to provide proof of your savings efforts.
  • Ensuring you have a regular and reliable income. Lenders want to know you have a steady income, so you can make your repayments. Holding a permanent position over at least two years should help with this.
  • Paying down your debts. Try to pay more than the minimum on your credit cards, and get your balance down to zero if you can. Consider closing accounts you don’t need. Keep paying down any other loans to reduce the amount of debt in your name. Over time, negative items on your credit report will fall away. As they do, your credit score should increase. However, it’s important to avoid adding any more negative actions in the meantime. Examples of these could include:
  • Multiple credit applications. Making lots of applications within a short period of time can make you look desperate for credit. Potential lenders don’t like this look, as it makes you seem like a credit risk. Only apply for credit when absolutely necessary, and only when you know you will be approved.
  • Unsuccessful credit applications. These look even worse on your credit file. However, they will fall away over time.
  • Defaults. Missed payments and defaults will pull down your credit score. Set up a payment reminder or automatic payment to ensure you always make your repayments on time. If you find you cannot make your repayment, contact your provider before the due date to see if there is any way to deal with the problem, without it affecting your credit report.
  • Bankruptcies, court judgments or debt agreements. Having any of these recorded on your credit report will lower your credit score significantly. As with all negative actions, they will be removed from your credit report in time, after which, your credit should improve.

TIP. If your application for a personal loan is rejected, it may be due to your credit. That rejected application will further bring down your credit score, so it would be better to take time to improve your credit rather than apply for another loan straight away. You may also ask the lender to provide details of why your application was rejected.

Using Your Personal Loan To Improve Your Credit

Once you’ve been approved, you can actually use your personal loan to improve your credit. By always making your repayments on time, should go towards raising your credit score. So, by the time you have finished paying off your loan, your improved credit should make it easier to get approved for other loans and credit cards, should you need to apply.

Another way you can use your personal loan to improve your credit is to use it to consolidate your debts. When you consolidate your debts in this way, you use your loan to pay off a number of other debts, closing those accounts and focusing on just one. If you have high-interest debts, such as credit cards, this could also help you to save on interest as well.

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