Your credit score or credit rating often affects how banks, lenders and other institutions want to give you credit or finance.
Therefore, it is important to know how to improve your credit score. Professional financial advisers also find it important to understand a credit score sometimes.
What causes a credit score to go down?
There are different reasons why a credit score can go down. In fact, many people don’t even know about some of them.
When you apply for finance, even if you do not avail it or take it up, a lender or bank is most likely running a credit check on you. So for example, if you apply for a credit card or car loan, but never actually take it, your credit score will often go down because an ‘inquiry’ was conducted.
Another way is when you set up new accounts. Many utilities companies such as phone providers, mobile phone companies, power providers, etc. often perform a credit check on potential customers. When they do this; it can show up as an ‘inquiry’ on your credit report, and cause your credit score to drop.
Different loans and liabilities you may have can cause your credit score to be reduced. If you also have outstanding ‘bad debts’, such as those that goto Baycorp or other collection agencies, they can be even more detrimental.
If you have bad debts that have gone to collections, try pay them off as soon as possible
When a debt gets sent to collections, sometimes the collections provider will offer the ability to pay it off over a long period of time. This might mean that you could have several years to pay back a sum of money. While this might be convenient in the short term, it means that you will probably continue to have an ‘unpaid default’ showing on your credit file. If it stays open as an ‘unpaid default’ this is likely to continually keep your credit score low.
Therefore, where possible & appropriate, it is generally suggested that bad debts are paid off urgently, so that your credit rating can start to rise up again.
What are other ways to improve your credit score?
Reduce the number of credit inquiries you perform – for example, avoid ‘checking in’ with different providers and shopping around for finance. If these finance providers keep conducting credit checks, this will keep pushing your credit score lower. If you want a significant amount of time, and do not continue to apply for finance, then your credit score is likely to rise again. This can take several months at least though to start showing an effect.
How is a credit score used in assessing an application for finance?
Many banks or lenders use credit scores in guiding them to decide whether or not to approve a loan or credit card for yourself. If your score is too low, it might compel them to automatically decline your application. That means that even though you have a good job, or you have a deposit for your house, or whatever it may be; an extremely low credit score can be a reason for an automatic decline.
Some lenders are willing to look a bit past the credit score, and not solely rely on the number. For example, if your credit score is low because of a bad debt due to being unemployed 4 years ago, but now you’ve shown stable employment, they might be able to look past this issue and understand it, and grant you credit.
What can I do if I have a low credit score?
Every person’s circumstance is different, so it is not possible to easily comment this on an individual basis. Generally, you will want to consider paying off debts, and stop inquiring or applying for new debts. You should pay your bills on time and your liabilities, as this can help to improve your credit score. You can also request a copy of your credit file so that you can start to understand in more detail why the credit score number might be so low. It might also be worth creating a family budget or seeking help from a budget advisor to get guidance on managing your finances.
Can I apply for finance with a low credit score?
You will generally find that banks and major lenders might be reluctant to give you a loan or similar if you have a very low credit score. There are other providers however such as finance companies, credit unions, and other types of alternative lenders, that are willing to consider your application. Try talk to a professional financial adviser for more information about this.
How do I find out my credit score?
To find out your credit score, you need to contact one of the credit reporting agencies. One popular website is www.mycreditfile.co.nz
, this provides a free copy of your credit report by Equifax. Another option is www.centrix.co.nz
, which is a different credit reporting agency. Different agencies have different ways of calculating or expressing your credit file.
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