How Does Credit Scoring Work In NZ?

A credit score is an important measure of your financial health. It affects a lot of factors such as your mortgages, loans, credit cards, and insurance, to name a few. Earning a good credit score is very important as it can influence the way you spend and afford things such as your broadband plan, mobile plan, tech gadgets, power, gas, and many more.

For beginners, credit scores can be confusing as they don’t have a universal or even a national standard. It’s all relative to individual lenders and financial institutions. What’s more, different terms such as credit history, credit report, creditworthiness, and credit reference agencies, among many others can cause even more confusion.

Once you know the ins and outs of a credit score, it’s actually a very simple concept. It can be overwhelming at first, but it’s not rocket science. Read on to find out the basics of credit scoring in New Zealand and different ways to improve it.

What is a credit score?

A credit score is a number between 0 and 1,000, indicating whether you pay your bills on time. The higher the number, the better the score. Most New Zealanders have credit scores of anywhere between 300 and 850. A good credit score is at least 500.

This also indicates how credit-worthy you are. Most broadband, utility, insurance, telco, and banks look at your credit score before you can get their product or service. This is especially true if you plan to pay for these goods and services monthly. Lenders also look at this information before letting you borrow money. This ensures you can pay what you owe.

If your score is lower than 250, most companies may require you to pay upfront or present plenty of requirements before getting approved. Some companies also charge higher interest rates for Kiwis with low credit scores. If you suffer from a low score, do your best to improve it.

What is a credit history, credit report, or credit reference agency?

Along with credit score, you’ll usually encounter these terms. These are associated with each other, so they may sound almost the same. However, they have unique functions that determine your credit score more comprehensively.

• Credit history - This is a complete list of all your purchases, applications, rejections, and transactions regarding credit. This tells whether you have an unpaid loan, credit card repayments, or late payments with your mortgage, broadband, phone contracts, and more. This can also be referred to as your credit ‘file’.

• Credit report - This is a summary of your credit history, which also indicates your credit score. Lenders use this report to assess whether you can pay the premiums of your loan, mortgage, or insurance.

• Creditworthiness - This is an assessment by the lender whether you’re likely to be indebted on your repayments, considering your credit history and income.

• Credit reference agencies - These are companies that collect and check whether your credit information is correct. They compile these data and send it out to providers if you wish to apply for a loan, mortgage, or insurance. The most well-known credit reference agencies are Equifax, Centrix, and illion.

How much information do lenders know about you?

Of course, companies simply refer to the information that you give. These are vital in determining your credit score and getting approved for your application. But, just up to what extent do you have to give? Which information is crucial for your credit score?

Basic identification information

Every application requires you to fill out an application form. It’s the main source of information that a lender refers to. All blanks in the form are crucial for the lender, so you must answer them as truthfully as possible. Each form is different, but you generally have to provide your:

• Full name
• Phone number
• Current address
• Whether you own or rent your home
• Dependents (if applicable)
• Salary (down to the last cent)
• Job title
• Employer
• Expenses, debts, and assets
• Reason for your application

Relationship with your previous provider, lender, and more

Before approving your application, the bank, insurance company, utility provider, and lenders may refer to your previous company. If you have a bad reputation or have not been a great customer, this may mean getting rejected. You may even end up on the company’s blacklist.

Credit score from credit reference agencies

Most companies refer to credit reference agencies such as Equifax, illion (formerly Dun & Bradstreet), Credit Simple, and Centrix to know your credit score. They determine this through:

• Debt collections - They check whether you’ve been defaulted on your credit or have been chased by debt collectors. They also check whether the balance is already paid.

• Electoral roll information - This accounts for your behaviour from your previous borrowings from all kinds of industries. Regardless if you’ve been a good payor or have been cleared of default, it stays on the record. It’s a publicly available record that contains address and residence details.

• Court information - If you’ve been indicted in court about your debts, this is accounted for in determining your credit score.

• Credit search data - This shows the record of who has accessed your credit report. This reflects how many times you’ve applied, approved, or rejected.

They take into account all this information for your approval. This also determines the interest rate, contract, or terms of your goods and service. Although, it’s important to remember that these are only bases. They still finalise their decision on whether you can afford to pay as of your current application.

Why do some people have a low credit score?

There are many reasons why Kiwis get a bad credit score, but it’s mostly determined by how you pay your bills. If you fail to pay your bills, your credit score decreases. If your spouse or partner defaults on debts on a credit card that has your name on it, it will impact your credit score negatively. Although, it can also be one of these reasons:

Applying for credit too many times

The idea of, “More applications, more chances of getting approved,” doesn’t apply to credits. If you’re rejected once, don’t reapply almost immediately. This will only impact your credit score negatively, as more rejections can lower your rating.

Pay your debts and try to get out of your defaults before reapplying. This way, you can increase your credit score for at least a little. This will increase the possibility of getting approved the next time, which will impact your credit score positively.

Using your credit card for every purchase

Credit cards are quite sneaky if you're not careful with your monthly payments! That’s why most people settle for only one credit card and try to pay the balance in full every month.

As much as possible, don’t max out your credit card. Keep the utilisation of your card below 20% of your max balance. This will make you appear more responsible about your spending as you only borrow relative to your income. Over time, this can increase your credit score.

Not checking your credit report

Credit reports are accurate most of the time. However, this doesn’t mean that discrepancies and errors won’t reflect in your report. Make it a habit to check your credit report at least once a year. Check for any errors and if you see one, file a dispute immediately.

To check your credit report, visit credit reference agencies (Equifax, illion, Credit Simple, and Centrix). Simply supply all the information they need and wait for about 10 to 20 working days to get it delivered to you. Most agencies offer this for free, but some may charge a fee for an express service.

How can you improve your credit score?

As mentioned, each company has a different assessment process when it comes to your credit score. Some businesses may approve your application despite your low rating, while others may still reject it even if you have a reputable score. If you want to guarantee your approval every time, check out tips to improve your credit score.

Check your credit report before application

Every time you apply for a major loan or mortgage which has high monthly repayments, make sure that you check your credit report. Double-check that all the information on the file is accurate. When accessing your file, request from all four major credit agencies. This way, you can ensure that all your details are correct across all your files.

Never be late on your payments

Whatever you do, never be late on your payments! Even if you already paid your missed payment, it can take years before you can finally recover from it. As this reflects on your credit file for at least five years, companies will tag this as a red flag whenever you apply for a credit card with a high credit limit or a mortgage plan with a high interest rate.

As a precaution, you can set up a direct debit to pay the full balance before the deadline. If you can’t pay the balance in full, at least pay the minimum balance. If this still doesn’t work out for you, contact the company and negotiate your payments and schedule. 

It’s best to keep your payments separate from anyone

Be it a spouse, a partner, flatmate, or anyone you live with, it’s best if you don’t include their names on your payments. Similarly, it’s also recommended not to put your name in theirs. This way, it won’t impact your credit score if they’re late in their payments for your power, TV, or rent. It’s also less of a hassle if you move out, as you don’t have to sort out their accounts too.

If your relationship ends for good, de-link all your joint finances such as credit cards, bank accounts, rental agreements, subscriptions, and more. Sort out whether to let one person continue the account or shut it down completely. Of course, this also means settling for any late payments and fees.

Only apply for credit when you need it

Every time you send an application for credit, the access is recorded on your file. When the records show these accesses are within a short amount of time, it may appear as if you’re desperate for approval. This may lead to more rejected applications! Before applying for credit, make sure you need it and it’s the one that matches your needs.

Accept whatever is approved of your application, even if the credit you receive isn’t what you expected like having a low credit limit on a credit card. Build up your credit score using the approved credit card, so you can get approved for a higher limit in your next application.

Take your time to rebuild your credit score

Don’t hurry when it comes to rebuilding your credit score. It takes years of being a responsible payor across all your finances before you gain a reputable credit score. Even if you have a low credit limit on your credit card or an uncompetitive mortgage rate, deal with it and try to stick with it for a few years. It will get better next time you apply.

If you’re building your credit score from scratch, start with a credit card. Look for a bank or institutions that have low eligibility criteria like GEM Finance and QMastercard. Make sure to utilise it well and pay your balance in full on time every month. This can reflect positively on your credit file, which can also increase your credit rating.

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