Even if you have a spotless record of repaying debt, anyone who’s ever applied for a credit card, home loan, phone plan or hire purchase agreement 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".
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. Often the anxiety you feel stems from a fear of the unknown. While many of us are aware of the extent to which a credit score can impact on our lives, we may be unaware of how they work and how they are calculated.
There will always be an element of mystery to the way credit scores are calculated (trade secrets!), but thanks to a few experts, we’re going to do our best to shed some light on the credit score number that may mean the difference between getting a loan or not.
What is a credit score?
It’s a piece of information that helps lenders to assess the creditworthiness for any type of lending, including business lending. Creditworthiness 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 score 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, personal loans, equipment rental, mortgages, and utilities).
Credit bureaus operating in New Zealand (Equifax, Dun & Bradstreet, and Centrix) collect information to determine your credit score and provide this information when a lender requests it. In order for a lender to request a copy of your credit information, your permission must be given; this is provided as part of an agreement to terms and conditions, verbally (over the phone) or through a contract.
Bad score? Bad news.
We all 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 (i.e. defaulting on the loan). Negative impacts to your credit score may have a negative impact on your ability to borrow in the future as your credit score will be available to lenders when running a credit check.
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 ask for help. 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 score, don’t lose heart – there are things you can do to improve your score 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.
Over time, a past credit problem can become less relevant to your credit score as recent payment patterns become more relevant. Defaults will still impact negatively on your score for up to five years, but their impact will get smaller on demonstration of a subsequent uplift in behaviour.
It’s important to remember that credit providers aren’t just banks. Telecommunications or utilities 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 score is or what’s on your report, you can contact a credit bureau and request your personal information. You can check the information is accurate, and that no one else has used your identity to obtain credit.
So that’s it, the low down on credit scores. If you’ve got a sinking feeling that your score may not be as good as you’d like, just remember that you can always make a comeback. The first step is to assess your situation and make a commitment to getting your finances in order.