Given everything that’s going on in our COVID-19 world, maintaining a healthy credit rating might be the last thing on your mind.
But protecting your financial reputation by retaining a good credit score does matter. Bad credit ratings can affect your ability to get a mortgage, secure a car loan, even get a credit card.
What’s a credit rating?
A credit rating, sometimes also known as a credit score, basically summarises your reliability as borrower. Lenders—like banks, credit card companies, and car dealerships—use them as one factor to decide whether to offer you credit, like a loan or credit card.
Credit scores are calculated using information in your credit reports, including:
- your payment history (whether you pay utility bills or credit card debt on time)
- the amount of debt you have
- the length of your credit history.
Good credit ratings versus weak credit ratings
In Australia, credit scores are usually calculated as a number between 0 - 1,200. A score towards the higher end is regarded as excellent, while a score towards the lower end is categorised as under average.1
Various credit reporting agencies have their own scoring models.
You’ll have a good credit record when you’ve been paying bills on time, your outstanding debts are regularly and routinely repaid, and you haven’t applied for too many loans with too many lenders.
What happens if you miss repayments because of COVID-19?
Many people have lost jobs because of COVID-19, while others are working shorter hours. The RBA says the official unemployment rate could hit 10% later this year.2 Financial stress is now a reality for many Australians.
However, just because we’ve had a once-in-a-century pandemic doesn’t mean banks, or service providers like phone and internet providers, stop recording missed payments. So many peoples’ credit scores are getting worse.
In other words, unless you’ve come to special arrangements with lenders and service providers, the system will act as normal. Often a missed repayment is the result of an oversight—an innocent mistake.
Temporary financial relief is possible
If you’re finding it difficult to pay bills and make repayments, you should know that banks, lenders, insurers, and other institutions are offering financial relief options for customers. But you need to get in contact with them so they can work out arrangements that take some pressure off you.
All banks have hardship programs where some of your debts may be waived or reduced, or mortgages deferred.
The Australian Banking Association (ABA) recently announced3 that during COVID-19, deferrals granted on home loans and other lines of credit won’t be reported as missed payments by banks, and credit ratings won’t be affected. To achieve this clean slate, customers will need to have met their repayment schedule prior to the virus outbreak in Australia.
People with insurance policies should also contact their insurer and discuss the possibility of deferring premiums.
Where to get extra help
If you’re suffering financial hardship because of COVID-19, it may help to talk to a financial counsellor who can provide guidance on how to manage your debts and finances. For free financial counselling, call 1800 007 007 or visit the National Debt Helpline.
The National Debt Helpline is a not-for-profit service that helps people tackle their debt problems. They are not a lender and don’t ‘sell’ anything or make money from you. Their professional financial counsellors offer a free, independent and confidential service.
If your matter is more complex, they can refer you to your closest face-to-face financial counselling service.
They can also put you in touch with other services you might require, such as legal services, crisis food and accommodation services, and health services.
1 Credit scores and credit reports. https://moneysmart.gov.au/managing-debt/credit-scores-and-credit-reports. Accessed 23 July 2020.
3 A COVID-19 mortgage deferral won’t affect your credit rating. Australian Bankers Association. 6 April 2020. https://www.ausbanking.org.au/a-covid-19-mortgage-deferral-wont-affect-your-credit-rating/. Accessed 23 July 2020.
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