How to Build Credit After (and During) a Bad Credit Car Loan

It’s easy to see bad credit as the end of the line. Your options are slim and the rates are higher than normal. It’s hard to see where you’ll go from here. But you should be seeing it as the first step in a journey that ends with a better credit score and more options.

Credit can be rebuilt after—and with—bad credit car loans. We’ll show you how.

Assessing Your Current Credit Situation

It’s imperative that you assess and monitor your credit report, understanding:

• What your score is
• What’s having the biggest impact
• What needs to improve

The first step is to check your credit report. There are premium services out there and they’ll give you helpful tools and features along with your credit report. But the main credit reporting agencies must provide you with a free report every 3 months, so you don’t need to pay.

Start by retrieving your report from these agencies:

• Equifax
• Experian
• Illion

Once you gain access, you’ll see the following:

• Identifying information, such as your name, addresses (past and present), and date of birth
• Active accounts and loans
• Previous on-time payments
• Missed payments and defaults

Scan your report and look for things that don’t fit. Have your previous addresses been entered correctly? Do you recognise the accounts on file? Can you confirm that you were at fault for any recorded defaults?

Everything from lender/reporting errors to identity theft can result in incorrect inputs, and these could be harming your report. If you find any issues, contact the reporting agency or the lender and insist on a change.

Paying Off a Bad Credit Car Loan

After fixing mistakes and inaccuracies, start thinking about your repayments.

A significant percentage of your score is based on payment history. As long as you keep making your payments on time, this part of your credit score will steadily improve. That’s true for all debt, including bad credit car loans.

Every monthly payment takes you one step closer to repaying the debt, and it also steadily improves your credit score.

• Set up automatic payments
• Repay more money if—and only if—you can afford to do so
• Prioritise debt repayment
• Don’t add new debts or lines of credit if you’re struggling with the ones you have
• Treat each month and each payment as a big step forward—something to be proud of

It takes time, so be patient. And remember, while one payment isn’t going to turn your score from bad to excellent, a single missed payment could send it the other way.

Understanding Credit Utilisation and Debt-to-Income Ratio

Debt is relative, as far as your credit report is concerned. A debt of $50,000 is astronomical to someone who earns less than $30,000 a year, but infinitesimal to someone earning 7 figures. To account for this, credit scores are based on something known as “credit utilisation”, as opposed to total debt amount.

It takes your total available credit (such as credit card limits), and then compares it to your debt. If you have three credit cards with limits of $10,000 each, and they all have $5,000 debt, it means your credit utilisation is 50%.

The lower the number is, the higher this part of your credit score will be.

You can improve credit utilisation by increasing credit limits, but that’s a risky strategy. The best option is to pay down as much debt as possible. The more you clear, the lower your responsibility will be. Creditors will then see you as a more worthy prospect when you apply for future loans and credit cards.

Some strategies include:

• Pay off the highest-interest debt first
• Use financial windfalls to clear debt
• Reduce unnecessary expenses (gym memberships you’re not using, TV subscriptions you’re not watching) and put the funds toward the debt
• Sell unwanted clothing and electronics

Building a Positive Credit History

Think twice before opening a new credit account. Whether it’s a buy-now-pay-later scheme for Christmas presents or a new personal loan, make sure you can afford it. Also, consider that new applications and new accounts will hurt your credit score in the short term. Of course, as long as you meet your payment obligations, those negatives will quickly offset and become positives.

If you’re looking for relatively low-risk accounts to rebuild your score, look into secured credit cards. Rather than tapping into an unsecured credit limit, they use an initial deposit as collateral and help you gradually repair your score. They can make for a great addition to any bad credit car loan in Australia.

Budgeting and Financial Planning

Good financial planning is at the heart of every debt repayment and credit improvement strategy. We live in a world where everything from gourmet food to media subscriptions is just a click away. It’s easy to spend money, and those expenditures accumulate.

Just take a look at these average spends:

• Over $60 on media subscriptions every month (per household)
• Between $2,000 and $3,000 on wasted food (per household)
• Over $40 on takeaway every month (per person)
• Over $2.4 billion per year on unused gym subscriptions (across the nation)

By reassessing your financial situation, you can remove the things you don’t need, cut down on areas where you overspend, and gain a little more perspective into your financial situation. Not only does it free up more cash for bad credit loan repayments, but it means you can start building an emergency fund instead of watching all of your money dwindle away on subscriptions you forgot you had.

Seeking Professional Financial Guidance

Help is out there if you need it. If you’re struggling with mounting debt or simply don’t know which way to turn, engage with a credit counsellor or financial advisor. They have the industry experience needed to steer you in the right direction and may help to relieve some of your burdens.

Bad credit car loans can put you on the road in a new set of wheels while also putting your credit report on the road to recovery.

• Check your credit report and dispute inaccuracies
• Keep making repayments (on your bad credit car loan and other financial accounts)
• Consider your credit utilisation ratio
• Budget carefully and plan every new loan and every major expense
• Seek financial assistance if you need it

After a few months, your credit score should improve and you can start repeating the benefits, including access to a wide range of financial products and improved rates/terms.

To start your journey, contact Ume Loans to secure a hassle-free bad credit loan in Australia.