Getting approved for a credit card is very difficult if you have a bad credit score. And, even if you’re approved, you’ll probably be offered less favourable terms than an applicant with good credit.
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What is the minimum credit score for a credit card in Australia?
Typically, lenders evaluate credit applications based on many factors, but your credit score is often integral to their assessment.
In Australia, three main credit agencies maintain your credit report: Equifax, illion and Experian. Each of them has a slightly different system for classifying scores.
A credit score gives lenders an idea of how safe — or risky — it is to lend to you. Bad credit refers to a low score.
Generally, you’ll need a good credit score to apply for a credit card.
Types of credit cards for bad credit
Very few options exist when it comes to credit cards for bad credit. You might find ‘no credit check’ and secured credit cards overseas, but these types of credit cards are unavailable in Australia.
Additionally, only some local credit card providers offer joint credit cards where two people can share access and financial responsibility for the same account. Although going down this road could increase your chance of approval, particularly if you’re applying alongside someone with solid credit, there are risks — like overspending and taking on someone else’s debt.
You could try a student credit card if you’re still in university or TAFE and have a poor credit score due to a lack of borrowing experience. These cards are aimed at young people who might not have a strong employment history or high income.
Pros and cons of getting a credit card with bad credit
You’ll also have to think about whether access to more credit is in your best interest.
A credit card can build credit when you use it responsibly, but if you’re already struggling with bills and other types of borrowing, then having a new card account could make repayments even more challenging to manage.
When you apply for a credit card with bad credit, you’ll likely receive less competitive terms, like a higher interest rate and lower credit limit. Consequently, you may be at greater risk of overspending and accumulating expensive debt.
What to consider before applying
According to all three credit agencies, applying for credit too often can hurt your credit score. That’s why it’s a good idea to consider your chance of being approved before applying.
Here are some factors lenders may take into account when assessing your financial situation:
- Your income. Do you have a regular source of income? How long have you been employed? Credit providers want to be sure you have the means to repay the amounts you borrow.
- Your repayment history. Have you been paying off loans and bills on time and making more than minimum payments on other credit cards? These actions demonstrate responsible financial behaviour to potential lenders.
- Your spending habits. After paying for expenses and bills, how much money do you have each month? Consistently spending more than you earn, overdrawing your bank accounts, or having direct debits bounce back are all likely to raise red flags.
Since lenders will look into your credit report for some of this information, checking your credit report to ensure it’s free from error is essential.
What to do if you’re approved
While it’s tempting to use your new card immediately, you’ll need to manage your finances even more carefully now that you have greater purchasing power. First things first, check your interest rate and credit limit carefully.
Here are some tips on how to use your new card to improve your credit rating:
- Not going over your card’s approved limit.
- Making on-time repayments.
- Repaying the entire balance each month. If this isn’t possible, then try to keep your card below 30% of your approved credit limit.
Setting a spending limit can get you off to a good start. Better still, create a monthly budget and stick to it so you’ve got more control over your money.
What to do if your application is rejected
It’s easy to lose heart if your application is declined. However, your credit score is dynamic and changes in line with your financial behaviour — so you may want to focus on repairing your borrowing reputation before applying for any type of credit again. Remember, making multiple applications in a short time can damage your creditworthiness.
If you already have a few credit cards, closing the cards you don’t need or reducing their limits shows you’re taking positive action to prevent excessive debt.
Paying rent, bills and other credit products on time and adjusting your spending so that you don’t need to borrow can improve your score over time.
Credit card alternatives to consider
Credit cards are only one of your options if you want to avoid carrying cash, make payments online, or take advantage of ‘tap and go’ technology. For example, consider a prepaid card where funds are preloaded and stored on the card. Of course, debit cards can also give you the same convenience, but unlike prepaid cards, debit cards are linked to your bank account.
Frequently asked questions
Applying for a credit card initiates a hard enquiry (or a hard check) because lenders need to assess your credit history for their lending decision. Having many hard enquiries on your credit file in a short time can lower your score as it signals to lenders that you’re having financial difficulties. Hard enquiries stay on your credit report for five years.
Different Types of Credit Cards in Australia
Different types of credit cards include rewards, low-interest and credit-building cards. When choosing a credit card, consider your spending habits and ability to repay the balance.
9 Things to Know Before Getting Your First Credit Card
Understanding the basics can save you time, money and frustration and get you on your way to building good credit.
What Affects Your Credit Score?
Your credit scores are determined by several factors, such as whether you pay bills on time and the length of time you’ve used credit.
How Is Credit Card Interest Calculated?
The interest you pay depends on your purchase rate per annum and your balance; avoid interest entirely by paying your bill in full.