Keith McLaughlin is the CEO of Centrix.
OPINION: Recent changes have been made to how consumers are assessed for different types of loans. New debt ratios, loan-assessment restrictions and changes to the Credit Agreements and Consumer Credit Act (CCCCA) have made it more difficult to borrow money.
Most of these fees are aimed at the mortgage market, but the CCCFA affects all types of loans.
The CCCFA focuses on how money is lent to consumers in New Zealand, to help protect you against unaffordable debt. The changes mean the assessment process may take longer as lenders will have to take extra steps to ensure the loan is affordable.
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When applying for the loan, the credit grantor will assess your credit history as well as whether you can afford the loan and meet your payment obligations. It is important that you understand aspects of the assessment process to ensure that you are in the best possible position when the time comes.
After all, almost every one of us will use credit at some point in our lives. Whether it’s applying for a credit card, opening an electricity account, or taking out a mortgage to buy a first home, credit underpins many aspects of our lives.
However, there is a lack of understanding about how individual credit scores work, what impacts our financial health and how we can take care of it in the long term.
What is a Credit Score?
Right off the bat, your credit score is an indicator of how likely you are to pay your bills on time and is a number between zero and 1000. The higher your credit score, the better your credit history.
You can find out your credit score at any time, by requesting your free personal credit report – which will give you a summary of your recent financial payment history.
Businesses, banks, utility companies, and finance companies rely on credit scores and credit reports to help them make lending decisions.
After all, they want to trust that they will be repaid, which makes credit scores extremely important and can be the difference between successfully securing a mortgage for their dream home – or not.
This also extends to other big-ticket items like car loans and personal loans, something to consider if you’re on the hunt for a new car this year.
What are lenders looking for?
Ultimately, lenders want to know that the people who borrow from them are trustworthy when it comes to paying back – and credit reports are a general barometer for that.
Things like how many open credit facilities you have, their borrowing limits, and whether you pay your bills on time all factor into your credit score.
If you regularly make prompt repayments, avoid taking on additional debt, and generally seem responsible with your finances, your credit score will likely be higher — and therefore more attractive to lenders.
Alternatively, major setbacks like defaults, bankruptcies, or a bad bill repayment history will negatively impact your credit rating.
What are the biggest credit mistakes made by Kiwis?
Maintaining a good credit repayment history is crucial. While missing an odd bill isn’t disastrous for your credit score, making a habit of it will negatively impact your credit score.
So it’s important to stay alert and not be too flippant when it comes to paying bills. Things like automatic payments and working with a financial advisor to find the best setup for your lifestyle will do wonders in the long run.
Ironically, not having a credit account in your name can be detrimental. Without a repayment history, lenders won’t have any benchmarks to assess you against and won’t be able to make an informed loan decision.
How can you improve your credit rating?
If you find yourself in the unfortunate position of having a bad credit rating, there are some steps you can take to begin to remedy this situation.
The easiest way to improve your credit score is to pay your bills on time and settle overdue defaults. If you regularly miss repayments, it’s worth reassessing your finances, writing a budget, and making lifestyle changes to help you meet your obligations.
Another simple action to limit your credit inquiries is to eliminate unnecessary credit checks that lower the score. Many credit checks can signal that you may be in financial difficulty and are looking for money to meet expenses or it can indicate fraudulent behavior, which will flag your account to potential lenders.
It’s never too late to talk with a financial mentor about creating a plan to rebuild and restore your credit score. The most important thing is to get started as soon as possible.
After all, the last thing you want is to find out that your credit score is bad when you’re about to apply for a mortgage or buy a big-ticket item like a vehicle.
Maintaining a good awareness of your financial health is important no matter where you are in life. Establishing good habits and ensuring you are a viable loan option will open doors for you as you begin to make more important financial decisions for yourself and your loved ones.
Familiarize yourself with your credit report information
Before applying for a loan, you should obtain a copy of your credit report to ensure that all information is correct. This will help you avoid unexpected surprises and delays in your loan application process.
Obtaining a copy of your credit report is free and there is a lot of useful information available to help you understand the different components of your credit report.
Centrix is New Zealand’s only local credit bureau. To visit www.centrix.co.nz to have your credit file sent to you.