New Zealand lenders have moved over to comprehensive credit reporting. This means credit bureaus are now looking at monthly account behaviour for all lending products as well as account behaviour for a number of utility bills. Basically, if you miss a payment, everyone will know about it. Lenders can also see all of your other lending including loan limits and whether you are keeping up with your repayments.
In the past, bureaus were simply looking at how many loans you had and if you’d defaulted on any of them or defaulted on a utility bill. Bureau credit scores also looked at how many enquiries you had. If you defaulted on an account (even if you paid it later) it will have negatively impacted your credit record.
With comprehensive reporting the key factor is ongoing behaviour. This can reward some consumers with better credit scores if they are well behaved. However, it can equally have a negative impact on consumers who don’t manage their finances well. How to keep your score up? Make sure you pay your utility bills on time every month and keep your credit within its approved limits, including overdrafts and credit cards. If you have a credit card, make sure you pay the minimum payment required on time every month.
This week we had a perfectly good client who had a terrible credit record because he’d done a balance transfer on a credit card, forgotten about it, and then made no repayments. On his credit record the card was four months in arrears and that obliterated his credit score to the point he was auto-declined by our system because his score was so low, before we even had a chance to look at it.
He hadn’t defaulted on anything and his behaviour with his other loans was otherwise good. He just wasn’t on top of this new credit card that wasn’t showing on his internet banking. This is not an uncommon oversight.
Although banks and utility providers won’t persecute you for missing the odd payment, it’s important to understand that missed payments and arrears will rapidly drop your credit score and limit access to credit.
Another important point to understand is that if you are finding your financial situation difficult, it’s best to talk to an adviser early on; not after you’re consistently missing payments. It’s far easier to get a solution in place early than later on. There are plenty of lenders out there for clients with bad credit but with that comes at an extra cost.
A number of lending products these days are risk-priced which means the worse your credit score, the higher the cost for borrowing.
In October this year, we’re going to see another change where you’ll be able to get loans priced upfront by referring to your credit score, but without the enquiry impacting on your credit score. We see this as a great step forward that will allow borrowers to better compare offers and hopefully increase competition.