Don’t Apply for Several Mortgages at Once (And Four Other Mistakes That Can Leave Black Marks on Your Credit Report)
Black marks remain on your credit report for five years. Here are key mistakes that lead to these negative listings.
What causes bad credit?
- Mistake 1: Applying for several mortgages at once
- Mistake 2: Only looking at the banks
- Mistake 3: Missing or delaying payments
- Mistake 4: Ignoring errors on your credit report
- Mistake 5: Mismanging your credit card
Negative information in your credit history will limit what you can do financially. For example, let’s say you want to buy a property. The lender’s going to take a look at your loan serviceability to see if you’re a good borrower.
As part of those checks, they’ll examine your credit file.
If they see black marks on your credit report, they’re less likely to grant the loan. Those marks suggest that you’re an irresponsible borrower who has bad credit.
Worst of all, these black marks stay listed on your credit report for five years.
The key is to avoid making the mistakes that lead to these marks appearing in the first place. Here are five you need to keep in mind.
Mistake #1 – Applying for Several Mortgages at Once
Shopping around for a good mortgage is definitely recommended. The problem comes when you try to hedge your bets by making several applications at once. You may want to have something to fall back on if you don’t get approved for the mortgage you want. So you send out several applications at the same time.
In a news.com.au article, getcreditscore.com.au CEO Luke Keller explains why this is a bad idea:
“Shopping around is a negative behaviour for all credit applications – cards, personal loans, and home loans. It implies that the borrower is a higher risk because they are having to go to lots of different lenders to try and get credit.”
The main issue here is that each application creates a mark on your credit report. Applying for credit from many lenders in quick succession suggests that your applications get refused.
This makes any new lenders less likely to accept the application. Thus, you create a cycle where each new application makes it harder for you to get a loan.
It’s best to wait several months between applications to show that you’re not desperate for a loan.
Mistake #2 – Only Looking at the Banks
As mentioned, every loan application you make to a bank gets recorded on your credit report.
Many people make the mistake of assuming banks are their only option.
However, there are alternatives, such as peer-to-peer lending. If you’re aware of Kickstarter, you have an idea of what this is. Instead of going to a lender, you essentially ask other individuals to fund your loan. People offer to loan you the money, often as part of a crowd of lenders, and you cut out the middleman.
This type of lending doesn’t have an effect on your credit report. As long as you repay your debts on time, it’s a viable alternative to traditional borrowing.
Mistake #3 – Missing or Delaying Payments
Speaking of paying your debts on time, failure to do so can leave marks on your report. Your payment history plays a huge role in determining your credit score. Every missed payment leaves a mark, with defaults being particularly difficult to clear.
Beyond the mistake of missing payments, you may also make the assumption that you only need to worry about loans and credit cards. This is not the case. Even your phone and utility bills get counted. If you miss any payments related to them, you may create a black mark that counts against you later.
Mistake #4 – Ignoring Errors on Your Credit Report
You have the right to request a free copy of your credit report every year from organisations like Experian and Equifax.
Failing to do so is a mistake in itself. Not having a current copy of your report means you can’t see what lenders see when they look into your background. It also means you can’t search for ways to improve your credit score.
When examining your credit report, you may spot errors. For example, a clerical error could lead to a debt getting attributed to you twice.
It’s crucial to take appropriate action to clear these mistakes.
Mistake #5 – Mismanaging Your Credit Card
How you manage your credit card can make or break your credit score.
Every card you have offers a maximum credit limit. Let’s assume that yours is $10,000. If you borrow $9,000 on that card, you’re close to maxing it out. This suggests to lenders that you’re an irresponsible borrower. Coming close to the max on several cards at the same time is an even worse sign.
According to Canstar:
“Most online sources agree that a credit utilisation ratio of about 50% will begin to affect your credit score. Spending between 10% to 30% of the available credit limit may be less likely to hurt a borrower’s credit rating.”
Try to stick within that 30% borrowing limit. This shows lenders that you only use credit in appropriate circumstances.
You may also feel tempted to do away with your credit cards altogether in an effort to improve your credit score.
This can also be a mistake.
While it doesn’t lead to black marks on your report, getting rid of a card with a good payment history means you can’t benefit from it. A track record of responsible borrowing and on-time repayments can actually help when you’re applying for a loan.
Closing a credit card you use responsibly gets rid of the evidence that you’re a good borrower.
Avoid the Black Marks
Sometimes, it’s the simplest mistakes that can lead to black marks on your credit report.
It’s obvious that missing payments will cause issues. But many borrowers don’t know that borrowing the maximum amount from a creditor can count against them. Many more don’t know that making multiple loan applications can create black marks.
Avoid these mistakes to keep your credit report as clean as possible.
And if you do run into credit issues, get in touch with DG Institute or read our article on how to dispute items on your credit report.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at email@example.com
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.