Will financial hardship affect my credit score?

Estimated reading time
min

Your credit score and why it matters
How applying for financial hardship could affect your credit report
How long hardship arrangements stay on your credit report

From out-of-the-blue job losses and unexpected illnesses to natural disasters like floods or bushfires, life can throw you some big curveballs - and they can have a huge impact on your finances.

If you find yourself in a situation where you’re struggling to make your repayments (which we call financial hardship) then support may be available to help you get through this difficult period. But while hardship assistance can give you some breathing space while you sort through the other big things going on in your life, it’s also important to understand how it may affect your credit score.

What is a credit score and why does it matter?

A credit score is a rating that helps businesses such as banks, credit card companies and utility providers decide whether to loan you money and on what terms. It is based on your financial history and ability to repay debt and represents all the information in your credit report.

While there are many factors that go into generating your credit score, some primary considerations are:

Your current level of debt
The number of credit applications you’ve made
Whether you make your repayments on time

So, if you’ve lost your job and you find yourself in a situation where you’re unable to make your monthly mortgage repayment, your credit score could go down. As a result, lenders may think it’s risky for you to borrow money.

However, if your score is higher you’re more likely to receive credit. In other words, doing what you can to protect your credit score could help you down the track.

What happens to my credit score if I receive hardship support?

The very short answer is that hardship support can help protect your credit score. But it can be a little more complicated than that.

First, let’s look at what happens if you’re experiencing financial hardship and don’t get support. This could mean you run the risk of missing repayments and having money overdue on your loans. Each month you miss shows up on your credit report and this information can bring down your credit score.

On the flip side, financial hardship support can help protect your credit score. Once you’ve entered a hardship arrangement, this is noted on your credit report – and as long as you meet the requirements of the hardship arrangement, you won’t be shown as missing repayments.

However, if you apply for new lending while a hardship arrangement is on your credit report, you may need to explain to the lender what happened and why you needed support, and this may affect their decision on whether to offer you credit.

How long will a hardship notice be on my credit report?

When you enter into a financial hardship arrangement, the actual reason behind your hardship won’t be listed on your credit report. The note about your arrangement will also be removed after 12 months.

It’s worth noting that there are protections in place if you have debts with other lenders. For example, they’re not allowed to reduce your credit card limit if you start receiving hardship support.

On the other hand, if your hardship application is declined, you’ll be expected to continue making repayments as usual, although you won’t have a hardship notice on your account. If you think you’re still going to have trouble making your repayments, it could be worth talking to a financial counsellor.