How financial hardship affects your credit score

Financial hardship can happen to anyone, whether it’s due to a sudden loss of income or unexpected challenges. It can make keeping up with bills overwhelming and may affect your credit score. However, financial hardship doesn’t have to lead to permanent credit report damage. In this article, we’ll explore how hardship arrangements affect your credit file and how to rebuild your credit if things don’t go as planned.

Financial hardship itself does not automatically lower your credit score. However, if financial difficulty leads to missed loan repayments, defaults, or late payments, these can appear on your credit report and reduce your score.

Setting up a financial hardship arrangement with your credit provider early can help protect your credit file and prevent long-term damage.

Quick actions to protect your credit

• Contact your lender early and request a hardship arrangement
• Prioritise essential payments like housing and utilities
• Avoid taking on new debt while under financial strain
• Stick to agreed repayment plans
• Keep credit card usage below 30%
• Check your credit report regularly for errors
• Create and follow a realistic budget.

Taking action early can prevent long-term credit damage and help you recover faster.

Financial hardship happens when life throws you a curveball; whether from rising living costs, a major life event, or other unexpected pressures; and suddenly, paying for everyday essentials like rent, utilities, or loan repayments becomes overwhelming. In these moments, many people turn to their credit provider for help, requesting a financial hardship arrangement or a hardship variation. These adjustments can temporarily ease the pressure by making your repayments more manageable.

Acting quickly is crucial. By reaching out early, you could access options like debt consolidation, refinancing, or a tailored repayment plan. If you’re already struggling with bills, our guide on what to do when you can’t pay your bills explains the first steps to take.. While these solutions may appear on your credit report, they’re a much better alternative to missed payments, which could lead to defaults and lasting damage to your credit file.

Causes of financial hardship

Financial hardship can result from job loss, medical expenses, or major life changes like divorce. Without savings, missed payments after job loss can harm your credit score for years, but a hardship arrangement can help protect your score if you stick to the terms.

Signs you may be experiencing financial hardship

Financial hardship often builds gradually. Some common warning signs include:

• Struggling to keep up with loan repayments or credit card bills
• Using credit cards to cover everyday living costs
• Missing payment due dates or paying bills late
• Receiving calls or letters from creditors about overdue payments
• Relying on payday loans or Buy Now Pay Later services to get through the month.

If any of these sound familiar, it’s worth taking action early before missed payments affect your credit score or credit report.

A financial hardship arrangement is an agreement between you and your credit provider to temporarily change your loan repayments when you’re struggling financially.

This may include:

• Reduced repayments for a period of time
• Pausing repayments
• Extending the loan term
• Consolidating debts into a more manageable plan.

In Australia, lenders are required under National Consumer Credit Protection laws to consider hardship variation requests if you cannot meet repayment obligations.

When you arrange a financial hardship variation, it appears on your credit report for up to 12 months. This won’t affect your credit score unless you miss payments outside the agreement. However, default listings can stay on your report for five years, so setting up a hardship plan early is crucial to avoid long-term damage.

Here’s how your credit report and repayment history can be affected:

Defaults: These can only be listed if:

• You’ve missed loan repayments
• You’ve been issued a default notice (which gives you 30 days to catch up)
• You’ve received notice that the default will be added to your credit file.

Repayment plans: If you’ve requested a repayment plan, creditors are required to wait 14 days after rejecting your request before listing a default. The faster you set up a plan, the more likely you are to avoid a default.

A default is a flag on your credit report that gets raised when you don’t pay back a debt, and the lender has gone to the trouble of putting it there by sending you a formal written notice telling you to pay up within 30 days. In Australia, the creditor can only put a default on your credit report if they’ve given you written notice that your payment is overdue and you haven’t managed to pay off the debt by the time that notice expires. If the debt remains unpaid after that 30 day window then it is likely the default will be added to your credit file.

Defaults can really hurt your credit score and will stay on your credit report for up to 5 years. In that time, any lender you approach may see you as a higher risk borrower, which can make it way harder to:

• Get approved for a home loan, car loan, or even just a personal loan
• Get a credit card
• Get a loan with a decent interest rate
• Even get approved for a rental or utility application some times.

Now the thing to bear in mind is that a hardship arrangement is different. If you can meet the agreed terms then the impact on your credit score will be limited. But a default sends a clear message that payments were missed, which is why acting early is so so important. If you can get in touch with your lender and sort out a hardship variation before you miss any payments, then you can avoid getting a default on your credit report and therefore protect your borrowing power.

If your debts feel overwhelming, learning the art of debt negotiation and how to talk to your creditors can help you arrange manageable repayments.

Avoiding financial hardship isn’t about luck; it’s about being proactive and having a solid plan in place. Here are some steps you can take to stay ahead:

• Start with a budget: A budget is the best way to get your finances on track. It helps you plan for bills, track your spending, and work towards your financial goals; whether that’s paying off debt, saving for something special, or just reducing financial stress.
• Build a savings buffer: Even small amounts saved regularly can add up and provide a cushion when times get tough, reducing your reliance on credit.
• Cut back on non-essentials: Temporarily pause subscriptions or other discretionary spending until your finances stabilise. It’s a quick way to free up extra cash.
• Act early: Don’t wait for bills to pile up. Seek hardship assistance as soon as you notice signs of financial strain. Setting up a budget and repayment plan early can prevent things from spiralling out of control.

By taking these steps and seeking help when needed, you can protect your credit score, avoid long-term financial damage, and get back on the path to financial stability.

If you’re struggling to make ends meet, here’s what you can do:

• Assess your budget: Prioritise essentials like housing, utilities, and groceries
• Request a hardship arrangement: Reach out to your creditor to prevent missed payments from impacting your credit
• Seek emergency assistance: Organisations like Foodbank Australia, the Salvation Army, and Lifeline can help with food and bills.

Budget you way out of financial hardship

Creating a budget is the key to navigating your way out of financial hardship. It gives you a complete picture of where your money’s going, helping you avoid missed payments that could hurt your credit score or credit file. Here’s a quick guide to get started:

• List all your income sources: Salary, benefits, and side hustle earnings
• Track essential expenses: Focus on rent, utilities, groceries, and loan repayments
• Cut non-essential spending: Pause subscriptions or reduce discretionary spending
• Build a savings buffer: Even small amounts can prevent reliance on credit
• Use a budgeting tool: MyBudget’s  Personal Budgeting Template helps you organise your finances, stay on top of payments, and protect your repayment history.

A solid budget helps you manage loan repayments, avoid defaults, and improve your credit score. If you need some assistance in getting started, MyBudget’s money coaches can work with you to create a personalised plan, tailored to your financial situation. Plus, we can also negotiate with creditors on your behalf to help organise more manageable payment arrangements, so you can avoid further damage to your credit file and focus on getting back on track.

Prioritising debt payments

When facing financial hardship, paying off debt should be a top priority. Your repayment history is a significant factor in your credit score, so staying on top of essential payments is crucial. If you’ve set up a financial hardship plan, make sure you fully understand the terms and stick to them. This shows lenders you’re managing your finances responsibly and helps prevent further credit damage.

Common mistakes to avoid during financial hardship

Navigating financial hardship can be overwhelming, but avoiding these mistakes will help keep you on track:

• Ignoring bills: Always communicate with your creditors; don’t ignore them
• Taking on more debt: Applying for additional credit cards or loans can make things worse
• Failing to budget: Without a clear budget, it’s easy to lose track of income and expenses, leading to more missed payments and a negative impact on your credit file.

How to rebuild credit after financial hardship

Rebuilding your credit score after financial hardship takes time, but it’s entirely possible with the right plan. Here’s how to start:

• Stick to your budget: Keeping track of your income and expenses will help you avoid missed payments in the future
• Keep credit utilisation low: Aim to use no more than 30% of your available credit to maintain a healthy credit score
• Check your credit report regularly: Review your credit file for errors and dispute inaccuracies with the credit reporting body. If you discover mistakes or outdated listings, our guide on how to clean your credit report and repair your credit score explains what to do next.

In some situations, people explore options like credit card balance transfers or formal debt solutions. Our guide to credit card balance transfers in Australia explains when they might help.

MyBudget’s Money Coaches can work with you to create a personalised plan to rebuild your credit and help get you back on track financially.

If you’re experiencing financial hardship, don’t put it off any longer; MyBudget is here to help. Our experts can help balance your budget, manage your repayments, and negotiate with creditors to create a personalised plan that fits your situation.

Give us a call at 1300 300 922 or enquire online to book your free appointment today.