Your credit rating matters

What is a credit rating and why does it matter?

Your credit rating – whether you realise it or not – matters. Especially with the newfound difficulty of obtaining any new lending in NZ, such as a credit card or a mortgage (including a top-up to existing lending for a renovation or something similar), your credit rating may matter now more than ever.

Nearly all adults have a credit score and credit history, even if we’ve never taken on any debt.

What is a credit score? (“credit rating”)

Your credit score relates to your credit history. Essentially, your credit score is a number between 0 and 1,000 that estimates your ability to keep up with bills. Scores are not part of your free credit report – they’re only included if you pay for a full credit report.

What’s a ‘good’ credit score?

Well, the higher the score, the better – it means you’re seen as low risk by lenders. Between 500-600 is the norm and scores in the 700+ range would be considered above average. Keep in mind that this number isn’t fixed and your credit rating can change over time. Your score can also vary between different credit agencies.

Several factors affect your credit score. These might include how often you’ve moved house and how short your credit history is, along with payment history, defaults (such as if you’ve missed a repayment, or not repaid a loan or some sort of credit), number of credit enquiries, etc.

What is a credit report?

A credit report covers your history of bill payments and use of credit, as well as any defaults or court judgements. Businesses, employers, and landlords may do a credit check on you when deciding whether to offer you credit (including a home loan), a job, or a tenancy.

How do I check my credit report?

There are three credit reporting bureaus, and you are entitled to get a free copy of your credit report from each of them:

• Illion
• Centrix
• Equifax

Once you receive your credit file, look it over carefully and if there are any errors, ask for them to be fixed. Identity fraud is on the rise and if you see enquiries, accounts, or defaults on your credit report that you didn’t know about, you may have been the subject of identity theft.

Your credit report contains your personal details (name, address, birthdate, etc.), details of any credit enquiries, as well as any recorded negative or positive data.

When a third party checks your credit, it will show up as an enquiry on your credit record, so think twice before letting anyone run a credit check on you - too many of these on a credit file can look bad to lenders.

Negative information includes details such as court judgements or payment defaults. A default is a missed payment that has been overdue for more than 30 days where the lender has tried to recover the money owed. Even when paid in full, a default can stay on your credit report for five years!

Positive information (which credit agencies were allowed to start collecting from 2012) can include details of your regular repayments – e.g. mortgage, credit card, hire purchase or loans. Your credit report may show what types of credit you currently have, the credit limit, and the name of the lender.

The move to positive credit reporting means that keeping up-to-date with payments can count for something!

Why having a good credit rating is important

Lenders nearly always do a credit check when you apply for credit – this might be opening a new account with a bank, finance company, applying for a mortgage, or even when arranging a phone or power provider. If you’ve got a clean repayment history there won’t be any issues there, but a bad credit rating can make it hard to get approved for finance or result in a lender charging you a higher interest rate.

A potential landlord or insurer may also want to check your credit history. Most employers now also run credit checks on job applicants! Chances are you might overlook it, as it is common in the fine print when you apply for a job, insurance policy, tenancy, and so on.

So, while you may not give much thought to your credit rating from day to day, it does pay to keep your record clean. Making payments on time is the best way to do that.

Given the financial stress placed on some people and families since Covid first emerged, here are a couple of tips if you’re experiencing financial hardship:

• Contact your lenders and credit providers. Find out what your options are if you are unable to pay on time, or the full amount due, and ask if there is any assistance available. Any providers you owe will probably be a lot more understanding if you reach out to them, rather than just start missing payments.
• Pay what you can. To avoid having late payments show up on your credit reports, try to make at least the minimum payment on accounts, or pay any amount you and the lender or creditor agree upon.

Learn more: 7 ways to improve your credit score