6 Step guide to fixing your bad credit

This 6 step guide to fixing your bad credit has been designed to help steer anyone struggling with debt and carrying around a bad credit history.

If you’re ready to say goodbye to your bad credit and start building a healthy and stable financial lifestyle this guide is for you!

Step #1: Deciding to change your financial habits & turn your bad credit around

All the advice and planning in the world will be utterly futile if you do not make a commitment to change your financial habits and turn your bad credit around – for good.

This article will provide you a series of steps and some practical advice to steer you in the right direction but ultimately whether or not your finances improve and you fix your bad credit depends entirely on you.

A great way to make sure you commit and stay committed to the process is to write out your goals or write down what it would look like and feel like to have your finances under control.

These goals will be different for everyone but we’ll give you some examples below to get you motivated. Keep in mind that you need to split these goals up into short-term, mid-term and long-term goals and, be very specific with the time frames for each.

Examples of financial goals in Australia:

• To have a 6-month emergency fund.
• To repay your student loan debt in full.
• To repay all credit card debt and short-term loans.
• To increase home equity.
• To open a superannuation and save for retirement.
• To have a good credit rating.
• To save for a down payment for a home loan.

Step #2: Review your financial situation

This is perhaps the most time-consuming step in this guide and will require that you set aside an hour or two, maybe more, to really review your finances and get a clear understanding of where you are and perhaps, where you want to be. At this stage you want to know how much you earn, how much you owe and to who and what your expenses, savings and investments currently look like.

We’re going to review these and try to cut down on expenses or reduce expenses later on. Also take note that for all the below steps, you need to consider your own as well as the income and expenses that your spouse is incurring so you should ideally review your finances together.

10 steps to reviewing your finances

1. List your weekly or monthly income and any additional sources of income.
2. Take note of the balance on your home loan, your current repayments, the frequency of these repayments and the remaining loan term.
3. If you do not have a home loan, list your rental amount and take note of any possible upcoming rental increases.
4. List all details relating to your car loan including how much you still owe, your monthly or weekly repayments, the interest rate you’re paying and any service fees your need to consider.
5. List all insurance policies you have, including vehicle insurance, and how much you pay for each.
6. Make a list of all your active credit cards, balances, minimum required repayments and interest rates.
7. List any other loans you may have including personal loans and any payday loans.
8. If you have a budget, this is the perfect time to review it, if not, you need to list all of your expenses from groceries to gym membership fees and anything that we have not covered above. Do not forget to include money spent on entertainment, eating out and so on.
9. Keep copies of any store account statements and overdue or current bills.
10. Make a list of all your savings accounts and investments as well as the interest earned or income generated from each.

Step #3: Request a copy of your credit report

Your credit report is essentially a summary of your credit behaviour and helps credit and service providers gauge the level of risk they’re taking on by lending you money. If you skip payments on bills and loans or have outright defaulted on any credit agreements, chances are that this behaviour is reflected in your credit report and that your credit score is low as a result.

Credit agencies in Australia

There are four major credit bureaus in Australia of which Equifax is currently the largest one.  We’re going to take a quick look at each of the four credit bureaus and give you an idea of how long it would take to request and receive your credit report from each.

It’s a good idea to choose two of the credit reporting agencies (preferable Equifax and Experian) and request your credit report from each of these but you do not need to request one from all four.

Credit bureaus in Australia:

• Equifax: will allow you to download a copy of your credit file for free once every 12 months or if you’ve recently been declined for a loan or had a listed item on your credit file corrected. It generally takes 10 days for your Equifax report to be delivered to you. Scores range from 0 to 1200.
• Experian: Allows you to access your credit report for free once every 12 months and will provide you with your credit score which will lie between 0 and 1000. You can request your report by email, by post or by calling them.
• Illion: Allows customers to request a free copy of their credit files and will even allow you to sign up for paid services to get notified if any changes are made to your credit.
• Tasmanian Collection Service: For those living in Tasmania, this is where you want to apply for a copy of your credit report.

Reviewing your credit report

Reviewing your credit report will allow you to see what lenders and service providers see when they look at your profile. You need to take account of all the items listed as well as get an understanding of what your credit rating says about you.

What to take note of when looking at your credit report:

• Are your personal details correct?
• All your current items, are they accurate? Identity theft can happen to anyone and your credit report is one way to find out if there has been any illegal activity. Current items include all your current personal loans and lines of credit, details on any late payments or defaults.
• Your credit score, what it’s at and what it means.

Step #4: Creating a new debt repayment plan & budget

Many people think that a debt repayment plan and a budget are the same thing but they are definitely not! They are simply two complimentary tools that you can use to help you in achieving your goal of fixing your bad credit and achieving financial freedom and long term wealth.

A debt repayment plan is simply a detailed account of what debts your needs to pay and how much you need to pay for a given period of time. You must start off with listing all your debts and their corresponding minimum monthly payments. You can then allocate any additional funds to make additional payments towards debts. You can use the snowball debt repayment or avalanche debt repayment methods to do this.

The avalanche method simply requires that you repay all debts as per their minimum required repayments and make additional payments to debts with the highest rates of interest which may be credit cards and short-term loans.

The snowball method simply requires that you use any additional cash to make repayments on debts with the smallest overall balance to get them out of the way and then work your way towards the larger debts.

Both of these methods offer a range of benefits but, if you want to improve your credit and keep abnormal credit activities to a minimum it’s best to go for the avalanche method and pay off the expensive debts first. This will save you money and ensure you do not close multiple lines of credit or loans at once which can be viewed negatively on your credit file.

Creating your budget

Now that you know how much you need to pay towards debts and where you would should allocate extra cash you may have, it’s time to create a budget that include all the expenses you listed in step #2. Once again, you should list all expenses as they generally occur.

Do not try to reduce expenses at this stage! Head on over and read our article “how to create a budget in 5 easy steps” to find out how to develop a realistic budget and make use of the latest apps and tools available to Australians.

Step #5: Reducing your expenses across all budget categories

Now that you know what your monthly income and expenses look like as well as how much debt you have, you can sit down and look at ways to reduce expenses and increase income where possible. Start with the highest expenses on your list and work your way to the smaller or more negligible items.

Two expenses that you should start with are your housing and vehicle costs. These are the most expensive and even a small reduction in either could help free up cash and repay debt faster. For more ideas on how to reduce expenses head on over and check out our 12 tips to budget your way to financial freedom.

Step #6: Optimising your loan repayments & negotiating better loan terms

If you simply do not have the required funds to keep up with your debt repayments it’s time to contact your creditors and inform them of your situation.

You may be able to negotiate better rates or lower repayments which will make it easier for you to make it through the week and then month. Even if you can afford to cover all your debt repayments, why not contact them anyway and try to negotiate for a lower interest rate? The worst thing that can happen is that they refuse your request and you keep on making the same repayments.

If you’re paying off a mortgage, you may want to check and see when your repayments are due and try to get these in line with your wages or salary. This is because interest on home loans is calculated per day and making your repayments late will cost you more.

When it comes to credit cards, learning how to better manage your credit cards and save is one of the most important things for you to do. Credit cards carry hefty annual fees and high interest rates and if you have multiple credit cards you may end up in a tight spot. In such a case you may need to use a balance transfer credit card to transfer debt and reduce the cost overall.