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Safeguarding your credit score during the coronavirus outbreak
How missed bills, payment deferrals and financial hardship agreements impact your credit score and what to do about it.
If you’re worried about how the current COVID-19 pandemic may affect your credit score, you probably have no reason to fret. Many of the events you hear about or may experience, bear no weight on your score and are not reflected on your report.
Your credit report is just a summary of how you’ve managed your credit accounts to date. For example, current accounts, applications for credit, defaults, bankruptcy or debt agreements, repayment record and requests for your report. It does not include any data about your income, any WINZ support, bank account balances, medical information or transaction history.
What happens if I miss a bill payment?
Provided the missed payment has not gone into default, only licensed credit providers can report your repayment history to a credit reporting bureau, which includes credit card accounts, personal loans and mortgages, but does not include utility providers or telcos. A payment is considered “on time” if the minimum payment amount was made on time (or within the 14-day grace period) for the month.
Missed payments from licensed providers can be reported on your account monthly and can be held on your credit report for two years. Since the introduction of comprehensive credit reporting, positive repayment history is also reflected, so as long as you make your minimum payments, your score does not drop.
What happens if I default on a bill?
A missed payment is considered to be in default and can be reported to the bureau if the amount is $100 or more, has been overdue for at least 30 days and after receiving the second notice from the creditor, or the amount remains unpaid for an additional 14 days.
A reported default harms your credit score, can remain on your credit file for five years and could negatively impact your ability to obtain credit in the future.
How can I avoid going into default?
If you’re struggling to make your repayments, make sure to speak to your bank, utility company or telco to discuss your options under their financial hardship policy. During this discussion, ask how the creditor reports your repayment history if you enter into a hardship variation and request that it is not listed as default or overdue payment.
If your creditor rejects your request for an arrangement, they can only list a default 14 days after the rejection. If the lender agrees to the repayment arrangement but does not agree with the credit-reporting part of your terms, you can take further action by reporting it to Financial Services Complaints Ltd. If the creditor agrees to an arrangement and you are making the agreed-upon payments, you are not considered to be in default.
What happens to my score if I defer my home loan payments?
Deferring your home loan repayments frees up cash for other more pressing expenses. The important thing is to contact your lender before you miss any repayments so you can organise a deferral. Due to the extraordinary circumstances of COVID-19, banks do not treat a mortgage holiday as a period of arrears. However, if you weren’t up-to-date on payments before applying for a deferral, this does not definitively mean that it will not impact your credit score. The best advice is to speak to your lender and ask what, if anything, is reported to the credit bureau and make the appropriate arrangement for your situation.
While each lender has a slightly different policy, you likely still accrue interest on your loan. Once you start making repayments again, these repayments increase because you have to pay back the interest and the missed repayments. Some lenders may allow you to extend your loan term instead, making smaller repayments over an additional period.
What if I decide to access my KiwiSaver?
If, as a last resort you elect to access your Kiwisaver, it is not reflected on your credit report.
What if I request a credit limit increase on my credit card?
Requesting a credit limit increase has the potential to affect your score. When you apply, your credit provider might pull your credit report, leaving what’s known as a hard enquiry. Plus, having too many enquiries on your file over a short period of time can decrease your score.
Is there anything that can help me manage my repayments?
If you’re struggling to make repayments on multiple credit cards or loans there are some debt consolidation options available. Debt consolidation means taking out another credit account (loan, credit card or other) and combining your existing accounts into one. Ultimately, this can help you reduce the separate fees and interest you’re being charged.
In addition to ensuring you meet the eligibility criteria for any new product, it’s essential to determine whether you can afford the repayments on a debt consolidation product and if it may put you in a more favourable financial position.
Quick ways to save money
Are you worried about your finances during this time? Don’t forget to review your bills – spending a little time on admin, could save you money over the weeks and months to come.
There are plenty of things you could do, from checking your energy rates, switching to a low-interest credit card, or simply dropping parts of your insurance that you don’t need.