Diana Clement: Make 2024 the year of the better credit rating

Over five years, average credit scores have dropped slightly for all people aged under 65. Photo / 123RF

OPINION:

A new year is a good time to turn over a new leaf. If that means sorting out your finances, then cleaning up your credit is a good place to start.

Virtually every adult in New Zealand has credit files kept on them at the three major credit reporting agencies (aka bureaus): Centrix, Equifax and Illion.

The agencies collect financial data such as repayment habits on almost every adult in New Zealand. They sell that data back to companies such as banks, lenders and utility providers, which use it to determine if an individual is worth lending to.

Good credit matters, says Canstar NZ general manager Jose George. “It’s easy to forget how important good credit is. Maintaining a good credit rating means you will be looked on more favourably when applying for financial products. The better your credit rating, and more eligible you are for the best rates and offers in the market across car loans, personal credit and mortgages. Ultimately, this means you’ll be able to manage your debt better, become debt-free quicker and have more choices and freedoms in your life.”

There are increasing numbers of consumers who have experienced a significant drop of greater than 100 points in their credit score in the second half of 2023, says Keith McLaughlin, managing director at Centrix. Over five years, average credit scores have dropped slightly for all people aged under 65.

“Credit scores will drop if a consumer starts showing late payment behaviour on their credit file,” says McLaughlin.

Over the past year, 18-39-year-olds in particular have been experiencing more downward trends in their credit scores than the rest of the population, he says. “They have been impacted by the cost of living pressures more than most.”

Mortgage adviser Geoff Bawden of Bawden Consulting says the difference between good credit and bad credit when it comes to a mortgage is whether you’ll get one or not. You’re unlikely to get a better deal because you have good credit. But you will get the loan, and not be forced to a non-bank lender that will charge more.

Learning to pay on time is useful for your long-term financial wellbeing. Photo / 123RF

It’s a very good idea to check your credit file with all three bureaus from time to time. It will highlight defaults and other black marks against your credit that you might not be aware of.

The reason you need to check all three agencies, not just one, is that they have contracts with different financial providers and therefore hold different sets of data. You never know which bureau a potential lender might use to get a credit score on you. It’s free to obtain your file.

Even if you never want to take out a loan, applying every year or two to see your credit file makes sense for other reasons. Potential employers sometimes check credit files. It can also flag identity fraud, where someone is impersonating you to get credit.

Anyone from family members to online criminals could have collected sufficient information about you to apply for credit in your name. It happened to me when someone used a bank statement stolen from my letterbox. I had to fight tooth and nail with the finance company to prove that it wasn’t my debt. It took nearly a year to clear up.

If you’ve been a victim of fraud you can apply to suppress your credit file. One application covers all three bureaus. A freeze prevents anyone else getting new credit in your name. You can still make temporary release requests to nominated credit providers if you need to take out credit.

Most likely the information on your reports is correct. If there are errors in the data there is a process to correct it. You might need to go to the creditor and ask them to correct the information held on file for you.

The other way to improve your credit rating is to simply start behaving well. The credit reporting agencies hold both positive information about you as well as negative.

As a result, positive behaviour such as paying your accounts on time every month is a great way to start improving your score. Over time, the negative information, such as defaults, will fall away.

Learning to pay on time is also useful for your long-term financial wellbeing. It means paying less interest and fewer late payment fees. It’s also a sign that you’re on top of your finances in general.