How to improve your credit score

If you’re struggling with getting finance because your credit score has taken a hit, there are ways that you can improve your situation in the longer term. It takes a bit of patience and some discipline, but it is do-able. Here are some tips that we’ve put together that can get you on the road to credit recovery.

Don’t miss your repayments

The key to a good credit rating is demonstrating that you’re reliable and can manage your monthly payments. If you prove that you can make regular payments, then you become a better credit risk meaning that you may be eligible to apply for finance further down the track at lower interest rates.
Setting aside funds for the set amounts you need to pay each month, and paying those first, will ensure that you don’t default.
Late fees and penalties can add up and cost you more in the long run so do what you can to avoid those additional costs.

Pay off any outstanding loans before you sign up to more debt

Set a target to reduce existing loans before taking on more debt. By adding more debt you’re risking not being able to maintain payments at the required levels, which will negatively affect your credit rating.

Before taking on more debt ask the question- “do I need this, or do I just want it”?
Be honest with yourself- you’ll find that you will be able to prioritise what’s important more easily and avoid impulse purchasing. If there is something you really want to have, you could set a goal to purchase it once you’ve paid of your existing debt. You’ll probably enjoy it more when you can see all your hard work has paid off!

Communicate with your lender if you are at risk of defaulting

Life often throws us a curveball and we end up with unexpected expenses. If something comes up and you’re going to struggle to make your monthly payments, be pro-active and call your lender. They may be able to help you with a debt holiday period for a couple of months or reduced payment amounts for a fixed period to enable you to get back on track. That way you will avoid defaulting and having a black mark on your credit score. Defaults can affect your credit score for up to 5 years. (Source BNZ website)

Don’t max out your credit cards

If you are always close to hitting your limit on your credit card, then you are damaging your credit score by having a high debt to credit ratio. This is something that lenders look at if they are assessing your risk to them. For example, if you have a $5000 limit and your credit card balance is $1500 your debt ratio is 30% which is considered a positive level. If your balance is $4000 then your debt ratio is 80% this could have a negative impact.

The higher your ratio the higher risk you present to lenders and this can negatively affect your credit score. So, keep an eye on your credit card balances and where you can, pay them off every month or try to occasionally put in a lump sum payment over and above your minimum payment amount to get the balance down.

Know what your credit score is

The best starting point is to know where you stand. You can find out what your credit score is by requesting a report from the following organisations, who keep records on your credit and make this information available to lenders.

Equifax – mycreditfile.co.nz
Illion – creditcheck.illion.co.nz
Centrix – centrix.co.nz

From there you can set up a plan with your lender, a budget advisory service or family advisor to improve your options to obtain finance in the future.