Even if you have a faultless record of repaying any debts, if you’ve ever applied for a credit card, home loan, phone contract or hire purchase agreement, you probably know the feeling that comes when you hear the words, “I’ll just have to run a credit check”.
When a lender runs a credit check, they’re requesting information that relates to your history of repaying debt to help determine whether you’re likely to repay what they’re lending to you.
A credit score (also called credit rating) is a piece of information that helps lenders to assess the creditworthiness for any type of lending, including for business lending. The score takes into consideration whether you’re likely to pay what you’re being leant.
Providers use many inputs to determine this, usually using as many sources of data as they can. These may include: your history of repayments elsewhere, the amount of money you currently owe, the length of your credit history, the amount you’re looking to borrow, and any other credit you have taken on previously (for example; credit cards, charge cards, overdrafts, personal loans, equipment rental, mortgages, and utilities).
This information is collected by one of the three major ‘credit bureaus’ and provided to other businesses when they request it. It is summarised in a score.
Most of you know that having a poor credit score is a bad thing. Examples of how this might happen are having late payments on your credit card or loan or failing to meet payments. Negative impacts to your credit score may have a negative impact on your ability to borrow in the future (such as buy a home) as your credit score will be available to lenders when running a credit check.
Especially if you’ve got a bad credit score, don’t lose heart – there are things you can do to improve your score over time. Here are the top seven ways:
While it may seem obvious, this is crucial. Missing your payment deadlines on a few bills is a quick way to put a dent in your credit score. A record of consistent and timely payments will help considerably towards getting a good credit rating.
Bank loans and credit cards aren’t the only thing that affect your credit score. Your electricity and telephone service providers (among others) are also credit providers, and they’ll report delinquent accounts to credit bureaus.
Every time you apply for a new credit account or credit card, your credit rating should slowly drop. So, don’t open any new credit accounts unless they’re absolutely necessary.
If you’ve got outstanding credit card payments, or overdue debt of any kind, pay these sums off as soon as possible. (Tip: if these debts can be called overdue, you’ve already left them too long!)
A consistently low credit card balance is much better for your credit score than a higher one.
If you have $300 owing on a credit card, then that amount has a 15% debt-to-credit ratio on a $2,000 credit card, but the same sum would be a 30% ratio on a $1,000 card. The lower your ratio, the better.
If you’re the kind to consistently spend the same amount on your credit card, it’s worth looking into one with a higher limit; however, don’t do this if you think it would tempt you to spend more. Of course, be sure to pay that debt off your credit cards in full each month!
This step may seem counter-productive to point number four, above, but that couldn’t be further from the truth. In fact, suddenly closing your credit cards won’t help to improve your credit score and may actually harm it.
To explain, while having maxed-out credit cards might be bad, having credit card accounts open with little-to-zero balances will show a reliable track record in handling money that has been lent to you. A low balance shows you’re financially responsible and pay back your debts on time.
In other words, the longer a credit account is maintained without any negative reports (such as a missed payment), the more it can improve your credit rating.
When you apply for credit (including if you’re shopping-around banks for a mortgage), the provider will check your credit report and this enquiry will be noted on your report. Having too many of these enquiries from numerous credit providers can have a negative impact on your credit score.
Remember, this doesn’t just mean applications for unsecured or secured finance, as phone, internet, and utility providers will also check your credit score as well. If you make yourself look desperate by triggering multiple enquiries in a short period of time, lenders may believe you are in some sort of financial stress and may be less keen to lend to you.
As a result? Your interest rates may go up, and your chances of being approved go down.
Let’s recap the top seven ways you can build a solid credit score:
If you’d like to check your own credit score, you can usually do so online for free – just make sure you’re using one of the three New Zealand providers; Credit Simple, illion, and Equifax. When you get your report, ensure you check it for accuracy – if anything is wrong you can ask the credit reporting company to correct it, each company has their own procedure for this.