Listed in: Managing finances

How to improve your credit rating

There’s an air of mystery to the way credit ratings are calculated. Here, we shed some light on what a credit rating is and how it can impact your ability to take out a loan.

4 minute read

Even if you have a spotless record of repaying debt, anyone who’s ever applied for a credit card, home loan, phone plan, or personal loan will know the vaguely anxious feeling that stirs in your chest when you hear the words, “I’ll just have to run a credit check”. Often the anxiety you feel stems from a fear of the unknown.

When a credit provider runs a credit check, they’re requesting information that relates to your history of repaying debt to determine whether you’re likely to repay what they’re lending to you. This article will shed some light on what a credit rating is and how it can impact whether you get approved for a new loan or not.

What is a credit rating?

It’s a piece of information that helps lenders to assess the creditworthiness of the borrower for any type of lending, including business lending. Credit worthiness takes into consideration whether you’re likely to pay your bills on time or repay the loan in full.

There are many inputs used to determine what your credit rating is. These may include: your payment history, the amount of money you owe, the length of your credit history, the amount you’re looking to borrow, and any other credit you have taken on (for example, credit cards, charge cards, overdrafts, Buy Now Pay Later, personal loans, equipment rental, mortgages, and utilities).

Credit reporting agencies operating in New Zealand (Equifax, illion, and Centrix) collect information to determine your credit rating and provide this information in a credit report when a lender requests it. In order for a lender to request a copy of your credit information, your permission must be given.

Bad credit rating?

A bad credit rating may have a negative impact on your ability to borrow in the future. Examples of how this might happen include not making payments on time, or failing to meet payments (i.e. defaulting). For a default to be reported to a credit reporting agency, it needs to meet certain criteria, including that the outstanding amount has been overdue for 30 days or more, and the lender has taken steps to try and recover the outstanding amount. A default can stay on your credit record for five years, even after you have paid the amount in full.

If you’re in financial difficulty and your debts are no longer manageable, it’s important to contact your lender(s) as soon as possible to inform them of your change in situation and explore the options that may be available to you. It’s better to be upfront with the facts than to repeatedly miss repayments without explanation.

Redemption is possible

If you’ve got a bad credit rating, don’t lose heart – there are things you can do to improve your rating over time.

The first step is to sort out your debts. If you’ve experienced problems in meeting your loan repayment requirements, aim to get back into a regular payment cycle. Repayment history allows you to demonstrate that you have rehabilitated your credit behaviour by showing a clear record of repayment over a period of time. Just remember, significant negative events like defaults can impact you for up to five years.

It’s important to remember that credit providers aren’t just lenders. Telecommunications or utility companies are also credit providers, so this means you need to ensure all your bills are paid on time.

Get it right, keep it tight

It’s important to be aware of any negative data you have on your credit report so you can seek to address it accordingly and put a plan in place to mitigate its impacts in the future. If you’re unsure what your credit rating is or what’s on your report, you can contact a credit reporting agency and request your personal information. You can check the information is accurate, and that no one else has used your identity to obtain credit.

If you’ve got a sinking feeling that your rating may not be as good as you’d like, just remember that there are things you can do to improve it. The first step is to assess your situation and make a commitment to getting your finances in order.

To request a copy of your credit report you can contact:
Equifax – mycreditfile.co.nz
Illion – creditcheck.illion.co.nz
Centrix – centrix.co.nz

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This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article.

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