The What, Why, Who and How of Credit Ratings
What is a credit rating?
A credit rating is an estimation of one’s ability to meet their financial obligations. It is based on previous financial history. Low credit ratings are the result of over-due payments-more than 30 days, unpaid fines including vehicle and court fines or even unpaid power bills. Credit ratings also show if you are insolvent or bankrupt.
Why are credit ratings important?
Credit ratings are important because it determines your chance of receiving a loan. Many loan companies and banks will not loan to people with low credit ratings. Credit ratings are difficult to re-establish, leaving you with a tainted credit history that follows you through life.
A tainted credit history may come back to haunt you during emergency financial situations. Maybe you have urgent medical bills or car repairs that you cannot afford without a loan. A bad credit history will make it difficult to receive a loan during financial short falls.
A good credit rating can benefit you by lowering interest rates on loans. If a lender sees you have a good credit history they may offer you lower interest rates.
Who determines your credit rating?
There are several CCR (comprehensive credit reporting) companies in New Zealand who work to provide credit information and analysis. CCR companies sell their services to banks, loan companies, employers and so on.
If you are not sure how your credit score is looking, you can always check yourself. Contact a company such as Centrix to request a credit rating report. It’s important to know how your credit rating appears to others.
How to build or re-establish a good credit rating?
The best method is prevention. Only take a loan out if you really need it. Stay on top of your bills to avoid dishonour fees. To make sure your payments are made on time, set up an automatic payment.
Keep your balance as low as possible and only borrow the amount you need. Make sure you are borrowing from a trusted lender, to ensure the transparency of the loan. You do not want to pay any hidden fees.
If your credit rating is already damaged, there are certain steps you can take to help with getting it back on track. First you should clear any outstanding debt you have. Debt is the most important and will have the highest interest rates. Do not pay the minimum payment or your loan will be never-ending. This is because you are paying off the interest incurred rather than the loan itself.
Make full payments by giving up bad spending habits such as expensive hobbies, excessive entertainment and fancy material items. Use that money to pay your debts.
If you still cannot afford your payments you should talk to your loan provider straight away. They are not the enemy! Arrange a repayment that works for both you and the company.
Do not open any new accounts whilst you are still paying off overdue debts. While it may seem like a good idea to close old accounts, if possible try not to. This may in fact damage your credit rating. The longer your financial history, the better your rating!