Credit scores - what are they, and why are they important?


#1

Sadly this isn’t a post answering the question but asking it! I browse the excellent reddit.com/r/personalfinance frequently, and while it offers a lot of good ways to manage money it does refer a lot to the importance of credit scores… I’m curious if anyone can explain what credit scores are, how they’re calculated, and how important they are in the New Zealand context!

Cheers,

Alexis


Credit Card Limit
#2

Hi Alexis,

Many thanks for your query on credit scores… here’s a summary that hopefully helps!

What are credit scores?
Credit scores are used by lenders when considering creditworthiness for any type of lending, including a credit check for business lending.  A credit score is calculated by credit bureaus, a higher number indicating the more credit worthy you are deemed to be.  Your score may impact whether you are approved for a loan, and may also reflect in the interest rate you’re charged - so looking after your credit score is important.

How are they calculated?
Credit bureaus - Veda, Dunn & Bradstreet, and Centrix in New Zealand - collect information to determine your credit score and provide this information to lenders on request.  Your credit score is determined using information such as your payment history, amounts owed, the length of your credit history, the extent of your new credit and the variety of credit types you have used.  Lenders use a combination of your credit score and other information (based on internally derived statistics) to help to determine whether it’s the right decision - for both you and the lender - to provide you with credit.

How important are they in the New Zealand context?
Credit scores help New Zealanders because they enable people to access manageable levels of lending and credit resources.  And having people with access to the right amount of lending and credit resources is in everyone’s best interests.

Regards,

Elizabeth


#3

I would love some tips on how you can improve your credit rating after you have paid back your debt?


#4

Hi Courtney,

Over time, a past credit problem become less relevant to your credit score, with more recent payment patterns becoming more relevant.

It’s important to remember that credit providers aren’t just banks - a telecommunications or utilities company is another example of a credit provider.  So, while you have repaid your debt to a financial institution, it is important to pay your bills on time.

Credit bureaus recommend other steps for managing/improving your credit score, such as ensuring that no one else uses your identify to obtain credit.  They also recommend checking your own credit rating to ensure the information is accurate.

Regards,

Elizabeth


#5

I don’t know if this is true in NZ, and it’s not directly about credit scores, but if you’re doing everything you can to look like a trustworthy borrower, read on.

Australian lenders usually assess you on your ‘potential current debt’. A good example is your credit card limit - lenders look at how much you _could_ have on your credit card, not how much you actually have. So if your balance is $200 but your limit is $5,000, they’ll treat you as if you’re $5,000 in debt. You can improve your prospects by cutting your limit down. Same goes for overdrafts - if you don’t need the limit that you have, cut it.


#6

Hi Max,

You’re right and many thanks for sharing that extra tip!

And the same applies to lenders here (as well as Australia).  The reason for your limit being taken into consideration is because, while you may currently have a balance outstanding which is lower than the limit, you still have the difference (I.e. limit less balance) available to you with any further approval required by your bank.  So, yes, to your suggestion on lowering your limit if you do not believe that you will have the need for it.

Regards,

Elizabeth


#7

Hi @Alexis and @Courtney , we took your queries on board and created a blog post on credit scores - what they are and how you can improve yours. Check it out, and share if you find it useful! https://community.bnz.co.nz/t5/Good-With-Money-blog/The-Low-Down-How-to-improve-your-credit-score/ba-p/829


#8

I believe Veda are the only credit reporting company that provide an actual credit score to its subscribers. (subscribers being creditors, banks etc)

The other two only offer credit reporting only.

The banks and other lenders may have their own internal scoring system.
Banks can refuse a person even becoming a customer if their Veda score is too low.

The ways to increase a credit score is 1. The passage of time. 2. Entries falling off the report after 5 years. 3. defaults being changed to a disputed status, 4. correction of some errors.

Things that do not affect your credit score at all 1. reducing your credit card limit. 2. Obtaining a copy of your own credit report.

Things that decrease the score. 1. Any subscriber to Veda eg banks, utility company etc that does a credit check against you. 2. Applying for credit card limit increases. 3. Filing an online credit application regardless of whether its accepted or not 4. A statement of correction you the debtor wishes to place on your own credit file. 5. Any default even if marked as disputed. 6. Court judgements and insolvencies including any company you may be a director of. 7. Errors made by others outside of your control. 8. The age of the credit file.

What about comprehensive reporting. This is a block graph that subscribers can see, where entries are made against you for every month you should be paying back your loan or credit card. If you are more than one day late in paying that month’s credit card payment it will be a negative strike against you. I don’t yet know whether the entry on the graph affects the credit score or not.

Is Veda’s current credit scoring system fair. NO.
Can peoples credit scores be damaged through someone elses errors. YES.
Can credit scores be negative. YES
Will Veda put right errors and scores that are damaged by their own maintenance systems. NO.
Is the risk of having substantial errors on your credit report made by someone else greater than the likelihood of there being fraudently activity on your report. YES.
Do you have a right to know how many points are going to be removed from your credit score before you are credit checked. NO.
When subscribers list debt against you do they have to prove to Veda the debt is legally valid. NO.
Is a credit reporter legally required to ensure data listed on a credit report is correct and accurate before its listed. NO.
Is credit reporting a legal part of the courts debt collection systems. NO.
Is there a credit reporting Act of law. NO.
Does a credit report belong to the debtor. NO
Is a credit report an asset to the debtor. NO
Is there any real benefit to credit reporting and scoring to the debtor. NO.
What laws govern the credit reporting system. Credit Reporting Privacy Code - under The Privacy Act.

Do we actually need a credit score system. NO.

How much does it actually cost to get your actual credit score $51.95

In 2014 the Privacy Commissioner found this fee unreasonable. Veda ignored that and there is no legal obligation for Veda to reduce the fee. The alternative options don’t allow you the all important credit score.

If you use a credit card to sign up for the Veda alerts will your credit card continue to be charged each year YES. Do you have a choice when you sign up. NO.

Say NO to credit scoring.