It’s a simple formula: the higher your credit score the lower your risk of defaulting in the eyes of lenders.
Lower risk means lender will be more likely to lend to you and offer you their very best rates. Higher risk means you’ll find it more difficult to be approved for credit. Even if you are approved, you should expect unfavourable rates until your credit rating improves.
Everyone can benefit from improving their credit rating, even if you already have a good credit history. This is one area of life where you really can’t have too much of a good thing, and comprehensive credit ratings have given everyone the power to change their credit for the better.
Whatever your credit file looks like, try these 10 tips to improve your credit rating, lower your perceived risk and enjoy more financial freedom:
1. Keep on top of your payments
Don’t miss a single payment on your credit cards, car, house and other loans for 24 months and you’ll begin to develop a spotless track record.
2. Don’t forget about utilities
Depending on the credit agency, you can also be judged on your payment of utility bills, phone contracts and other accounts – so make sure these are on your side
3. Pay by direct debit
When payments are taken from your account automatically, you won’t have to worry about missing deadlines - just make sure you always have enough funds available when payments are due!
4. Demonstrate financial control
Try to keep your credit card limit fairly low. Your credit file doesn't show the balance of your card account, just the limit - that is the amount of credit available to you. The higher the limit the more it appears you may be in substantial debt with less chance of paying it off. A lower limit may appear more manageable and more likely to be considered a lower risk.
5. Check your credit report
Request free copies of your credit report from all three of New Zealand’s credit reporting bodies. Check through the report and deal with any mistakes or outstanding issues you’ve missed that could be costing you.
6. Dispute any errors
If you do notice any mistakes in your credit report, inform the credit reporting body. They will investigate the issue and remove the item from your record if the lender in question cannot provide evidence to support it.
7. Pay off your defaults
If you have defaulted on a credit card or a loan, pay it off as soon as possible. The default will still be included on your credit report for five years, but it will be indicated as paid. A paid default will not drag your credit score down as much as an unpaid debt.
8. Contact your lenders
If you’re worried that you can’t make a payment, let your lender know as soon as possible. You may be able to modify your payment terms and you can worry less about defaulting.
9. Only borrow money when you need it
Avoid taking out a loan if there’s a risk you might miss a payment during the loan term, as this will have a long-term impact on your credit rating and make it more difficult to apply for credit in the future.
10. Get older
You don't have a lot of control over this one but credit scores can improve as you age. A longer history contains more information and the more information in your file, the more accurately your behaviour can be predicted. As you get older you are also more likely to have ticked off more life events pertaining to credit, such as buying a house or having utilities in your name, and you've had the chance to demonstrate how you manage your credit accounts through life's ups and downs such as job changes, getting married and having children.
Next up in Credit Score Bootcamp: