KEY POINTS:
Twelve per cent of the population have bad credit records - yet many people may be unaware of their financial blacklisting until their mortgage, credit card or hire purchase application is rejected.
"In New Zealand we are very poor at managing our own credit files," says John Roberts, country manager of credit reporter Veda Advantage. "Often people don't realise there is a default on their file until they apply for credit and get turned down."
Assistant privacy commissioner Katrine Evans says she receives complaints from people who have applied for a home mortgage and been turned down because they have a bad credit record.
"They're startled because they didn't realise they had a bad record. It can be very inconvenient for them."
So it's worth checking your file before applying for a mortgage to see if there is anything lurking there that you don't anticipate.
Roberts gives the example of a flatting situation when a phone account is opened and the flat later disbands, leaving the account unpaid. The person whose name the account is in could have the default lodged on their record without being aware.
Negative records such as collection accounts, late payments and bankruptcies stay on your credit report for up to seven years - even if you pay them off. Recorded defaults indicate to lenders that you are a higher risk.
New Zealand consumers are not given a credit score or rating as happens in the United States - mismanagement of just one facility can mean the difference between accessing affordable mainstream credit when you need it and being forced to pay a high price for funds through a sub-prime lender.
It is not only credit providers who base lending decisions on a credit report. Landlords can check the records of a prospective tenant, as can telcos and energy companies, so diligent management of credit facilities is important.
John Scott, general manager of credit reporting and debt collection agency Dun & Bradstreet, sees the impacts of mismanaged debt every day. He says many New Zealanders don't understand how their credit report is compiled and are unaware of the information credit providers use to make their lending decisions.
Checking your credit file does not have a detrimental impact on credit applications - you should check it regularly to ensure its accuracy. However, every time you apply for credit and a lending organisation checks your credit record, it leaves what Roberts calls a "footprint" on the file. He says this can be a leading indicator of someone's financial situation.
"If you see someone has approached 10 different finance companies in the past week, that would suggest they've got a bit of credit stress in their life."
You are entitled to a free copy of your credit report, says Evans, which can be accessed through the credit reporting bureaus - Dun & Bradstreet or Veda Advantage.
The bureaus provide a dispute mechanism should you disagree with any of the information in your report, and incorrectly noted defaults will be removed from your file. Checking your file regularly will also help you avoid identity theft. "We find that people will make credit applications in someone else's name and then default on them," Evans says. "It's a good idea to check your records once a year for those reasons."
When you enter into a contract with a credit provider, it invariably provides that consequent on failure to pay, your details will be passed to a credit bureau.
"Some people sign the contracts without being fully aware of the ramifications of not keeping up with payments," Scott says.
Understanding the system is the critical first step in ensuring that you effectively manage your financial health. For example, paying an overdue debt will not remove the listing from your credit report.
Many believe failure to pay small debts and credit facilities with non-bank lenders - as opposed to big-ticket items such as a home mortgage - won't have the same impact on their credit report.
So people tend to be more diligent about their home mortgage but pay less attention to their mobile phone bill or gas account. The size of the debt and its source is irrelevant - all negative payment behaviours will be listed on your credit report and should be given equal attention.
Another common misconception is that closing old accounts will improve your ability to access future credit. In New Zealand a credit report contains a listing of credit applications but it does not show whether the applications have been approved. This means closing a credit facility will have no impact on your credit file.
There is no quick fix to perk up your credit report.
You need to take a holistic approach to managing your financial health - pay your bills on time, reduce your debts and make sure your credit report is accurate.
