Getting your credit score higher can make a difference in many aspects of your life. File photo. Photo: Shutterstock / Allie Schmitz
You have probably heard people talk about credit scores.
Who has got a good one - usually people in the top of the South Island - who is not doing so well, and maybe even how to improve your score.
Buy why does it matter?
Here are a few ways that your credit score could affect your life.
First, what is a credit score?
A credit score is a number that is assigned to you, to reflect how likely you are to repay money lent to you, or to meet your obligations for ongoing things like a phone or power bill.
There are three reporting agencies in New Zealand and what constitutes a bad, good, or excellent score is a little different with each but generally the higher score, the better bet you are from a lender's perspective.
Scores get better when you repay debt on time, or pay your bills. New Zealand has a comprehensive credit reporting regime that means that payments made can count in your favour, as well as missed payments and defaults counting against you.
Where does it make a difference?
In other parts of the world, your credit score can make a really big difference to what you pay for things like loans.
Centrix chief operating officer Monika Lacey, said the impact was not as significant here because we do not have as much "risk-based pricing".
But she said credit scores could still affect what a loan might cost because it could alter who you could get the loan from the in the first place.
"In New Zealand banks for example have a very low risk appetite. They're more likely to want customers with a higher credit score."
People with a less good score might then have to go to a second-tier lender who might charge a higher interest rate.
"The mortgage market is a good example of that. Banks offer a rate but if you go to second tier lender like Avanti or Pepper, their interest rates tend to be a little bit higher."
Power bills and phone bills
Sometimes, power and telecommunications companies might be reluctant to give you an account if you have bad credit.
For power, that can mean sometimes that you will need to opt for a prepay plan until you can rehabilitate your credit score. This means you "top up" your power account before you use any electricity. Powerswitch warns that this can sometimes cost more than a monthly plan and there can be fees involved.
Applying for a job
Sometimes, a job application includes the potential for a credit check.
Lacey said this should only happen if it was a job that would actually mean a person was involved with the organisation's finances.
"That's how the credit reporting privacy code is written. If you're going for a job as a warehouse person or a bus driver there should be no reason to run a credit check on you at that point because you're not in a position where you can manipulate finances. But if you're applying for a role as a financial controller there's more relevance there."
Applying for a rental property
Some landlords also ask for a credit check as part of the tenancy application process.
Lacey said this would depend on a landlord's risk appetite. "Some might be more willing to take on a bit more risk, others might be quite strict on that. It's similar to a lender, that's a business decision they make."
Auckland Property Investors Association general manager Sarina Gibbon said her organisation recommended credit checking all short-listed tenant applicants to find the best candidate on merit.
"Most professional landlords and property managers do this routinely. That said, I frequently hear from landlords stuck in tenancy disputes who admit they skipped credit checks and went with their gut feeling instead. So yes, I believe more widespread credit checking would lead to better rental decisions across the board.
"The market has shifted recently, though. A less-than-perfect credit history isn't the deal-breaker it was a year ago. With rental oversupply in several major centres, landlords now face a choice: leave properties vacant or adjust their expectations. This often means considering applicants with B or B+ credit histories when everything else in their application looks strong. The updated tenancy laws have also given landlords more flexibility to look beyond their previous 'ideal tenant' checklist."
She said people could boost their chances by being upfront in their applications.
"If you really want to secure a property, the landlord would be far more open to working with you if you let them know the context of your credit score and what you are doing to get back on track. A bit of transparency, candidness and personal accountability will go a long way with most landlords."
Lacey said anyone with bad credit who could improve their cried scores would find it created more opportunity for safer credit or lower interest rates.
"The risk is people with a low credit score, particularly where it's really low, might go into that third-tier lending where interest rates are a lot higher.
"They've had a life instance happen whether they've lost a job or whatever circumstances they are struggling to meet their obligations, so they're doing it tough anyway. By having a lower credit score there is a risk that they end up in that cycle of paying more for the credit so it is harder than if they were getting a better interest rate."
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