Credit Ratings: What is ‘Bad Credit’ and ‘Good Credit’?
Everything you need to know about the difference between a good and bad credit rating and how to can improve yours.
Your credit history plays an important role in being granted approval for products such as mortgages, car loans and credit cards. Essentially, your credit report is a historical summary of all the loans, accounts and other lines of credit you have used in the past five years, including ones you may have applied for but were not granted. This report also contains information about your open credit accounts, repayment habits and payment defaults, as well as legal information pertaining to things like bankruptcy, court writs or judgments, debt and insolvency agreements.
Whenever you apply for any sort of credit, even mobile or internet plans, the details of your application are sent to Credit Reporting Companies (CBCs), whose business it is to maintain and update your credit report. This report is then made available to financial institutions and credit lenders who may consider granting future loan applications, based on your previous history of borrowing and repayment.
In New Zealand, it is common for financial institutions to privately determine credit ratings when you apply for any form of credit, including loans, credit cards and credit limit increases. They may never give you detailed information about this “internal” credit rating, but a good or bad credit rating can influence the outcome of your application. Some lenders may assess the amount of money you can safely borrow based on their own system of calculation.
If your record tracks a poor pattern of debt repayment, you will naturally be considered a high credit risk and may be refused credit or offered a higher interest rate. To discover what is on your credit ratings report, request a free copy of your credit history from the CBCs in New Zealand, such as Dun & Bradstreet or Equifax, or you can request a free copy of your credit score here, through finder.
What is a good credit rating?
In general, a good credit rating will improve your chances of applying for credit at a higher limit with better repayment terms. While lenders are trending towards a more comprehensive or positive system of assessment, until now, the credit reporting system has predominantly focussed on negative marks such as overdue debt and credit infractions.
As such, a healthy credit report is signalled by the lack of black marks, like late payments and credit defaults. That said, a blank credit report isn’t necessarily reassuring to lenders. Most lenders are more likely to prefer someone with a proven record of responsibly maintaining open accounts, over someone with no history of borrowing. The characteristics of a good credit report include established credit accounts with low balances; regular repayments made on or before the due date; and a clean legal record.
How can I develop a good credit rating?
- Establish healthy accounts. As long as you regularly pay your bill on time, having a mobile or internet plan, electricity account or Sky service in your name is a good way to establish proof that you are a responsible borrower.
- Make punctual payments. Paying your bills on time sends good signals to lenders and demonstrates your ability to make timely repayments.
- Stay free of debt. Avoiding debt will also demonstrate your ability to repay your balances and could position you as a low-risk applicant. Lenders may be less inclined to approve your application if you are already in debt or your credit history shows you have trouble managing your funds.
- Demonstrating job stability. Staying in the same job for a few years, rather than frequently hopping between employment, demonstrates responsibility to potential lenders, as well as your ability to repay.
- Living in the same place. Long-term rental or homeownership also demonstrates responsibility and gives lenders the comfort of knowing you are not likely to default on your payments.
- Make infrequent credit card applications. Each credit card application you make shows on your credit report, regardless of whether it is approved. Having numerous credit card applications on your report, can also send negative signals regarding your eligibility and ability to manage your funds.
What is a bad credit rating?
A bad credit rating can result in rejected applications, lower credit limits and more restrictive repayment terms. A bad credit report is usually scarred by things like bankruptcy declarations, payment defaults, court charges or court writs relating to finance (such as fines and fraud charges). Less extreme black marks include late payments, high credit balances and frequent applications for credit (such as applying for three credit cards in a month).
Having a lot of active credit accounts can also negatively affect your credit score, especially if you also have issues with any of the above. Unless all of your accounts are in good standing, this could indicate a lack of responsibility managing your credit.
What can cause a bad credit rating?
The following can result in a negative credit rating:
- Numerous credit accounts and applications. Having too many loans in your name isn’t a good look because it brings into question your ability to manage and repay all of them at once. All loan applications stay on record for five years.
- Credit enquiries. Every time you apply for credit, the lender makes enquiries into your credit history. These enquiries are recorded on the reports and going forward, leave a trail of credit enquiries that other future lenders will not look favourably upon. These stay on record for five years.
- Late or skipped payments. Poor payment habits can be a warning sign to potential lenders, so it is always better to make repayments on time, even if it is a small or partial amount. It is also important to remember that loan repayment history stays on your record for two years.
- Credit defaults. This happens when a lender takes action to retrieve an outstanding payment, and it stays on your record for five years.
- Court writs and summons. These legal blemishes stay on your record for five years.
- Serious credit infringement or clearouts. If you fail to make payment and the creditor is unable to contact you for more than six months, a serious credit infringement will be marked on your record for five years.
- Bankruptcy and insolvency. These will stay on your report for four years after the start of insolvency. If you are subject to multiple bankruptcy judgements, this information may remain on your credit rating indefinitely.
How can I check my credit rating?
There are services in New Zealand that provide credit scoring, including independent businesses such as Credit Simple, CRCs like Equifax and Centrix which offer credit ratings, with their credit report packages.
While the credit scores you obtain from these services will vary, they can still be useful in giving you a general idea of the types of loans and credit cards you can get. When you have obtained your credit score with Credit Simple, they provide a list of offers, for example, credit cards and personal loans for you to consider.
The range of details in the report may vary between these companies, so it can be useful to request free copies of your reports from all of them to see exactly what is there and to ensure that they are all correct. You should contact the credit reporting company as soon as possible if you find any mistakes in your credit history.
Rest assured that the details on your credit history are protected by the Privacy Act (1993) such that only you and authorised agents can access the information.
What are my options if I have a bad credit rating?
If you find that you have bad credit, you may be able to improve it by practicing responsible borrowing habits, such as making payments on time. It could be worth taking stock of all your credit accounts or consolidating debts so it becomes easier to pay them off, which will improve your credit score in the long run.
There are credit repair services that offer guidance and counselling to help improve your credit score. Just be aware that some of these services charge money and may not be worth it, but this depends on your circumstances.
You can take comfort knowing that time is on your side in this scenario, because all of your black marks will be erased from the report in five years if you start developing responsible repayment habits today. If you can’t wait that long and need credit, there are personal loans and credit cards that cater to customers with bad credit ratings. You can compare other credit options here, if you have a bad credit rating.
While knowing your credit rating is useful to improve your credit history or when applying for a loan, it is merely an indicator of whether you will receive the credit you want. However, you should also consider other eligibility requirements, such as your present employment, total income and current assets before you apply for your next line of credit.