We all mess up sometimes. Maybe you’ve forgotten about a credit card, missed a loan payment, or had a bill go to Baycorp. All of these things can affect your credit score, and a poor credit score can negatively impact your life in many ways.
Bad credit can really make certain areas of your life more difficult. Read here to learn how a poor credit score can negatively impact you.
Unfortunately, poor decisions can have a lasting impact on the things you can do later on in life. Read on to learn how a bad credit rating can impact you and your family.
The Consequences of a Poor Credit Score
These days, we’re constantly being identified by our credit reports. When businesses are deciding whether they’ll lend us money, they look at our credit rating.
Any past mistakes like missed mortgage repayments or bills sent to collections can give you a poor credit score, affecting your ability to borrow money. That’s why it’s so important to understand the way credit scores work.
What are Credit Reports?
Think of your credit report a little like your school report card. But instead of being graded for your homework, you’re graded according to your financial history.
Your credit report includes details of any payment defaults. This is when you’re more than 30 days late making a payment, and the lender begins taking steps to recover the amount you owe.
Credit reports also show how much you’ve borrowed elsewhere, and if you’re regularly making repayments. Examples include:
- Your mortgage
- Car finance
- Unpaid fines
- Hire purchases
- Credit cards
- Even your phone and power bills
The more you make your repayments on time, the cleaner your credit report will be.
In New Zealand, any of these credit reporters may hold your credit details:
- Dun and Bradstreet
You can also request information from any of the above credit reporters at no cost. It’s a good idea to regularly check your credit report, so you can correct any wrong information and know where you stand before you try to borrow money.
The Negative Impact of a Bad Credit Rating
Obviously, a poor credit score is not ideal. And some of the consequences include:
Trouble Getting Finance
Need to purchase a new car? Planning to use hire purchase? Expect a credit check to be performed. When you have a bad credit rating, lenders are unlikely to finance you, as they assume you’re likely to also default on their payments.
Issues Getting a Mortgage
Deciding to buy a house is one of the biggest decisions you’ll ever make. But unfortunately, actions which happened when you were younger can impact whether or not the bank will give you a mortgage. And if you do get a mortgage, you may not be able to borrow as much as you would like.
Problems Becoming a Tenant
These days, landlords are becoming increasingly wary, as stories of bad tenants continue to dominate the news. Most landlords and property management companies will perform a credit check on prospective tenants before they allow them to move in.
In cities like Auckland, where the housing crisis continues to grow, this can have huge implications if you have a poor credit score. Landlords are unwilling to take the risk if tenants have defaulted on payments previously.
Declined Utility Applications
Unfortunately, bad credit history can even impact your day to day life. This includes getting gas or electricity hooked up to your new home. Utility companies also perform credit checks, and if you have a history of not paying bills, they will avoid taking you as a customer.
If they do allow you to have electricity connected, you’ll often need to choose a prepaid service such as GLO-BUG.
Some lenders will still allow you to borrow money with a poor credit score. But they’ll usually charge you a much higher interest rate.
This shows how many people end up in the poverty cycle. Once you begin defaulting on bills or accidentally miss a payment, it can have a run-on effect which costs you much more over the long term.
While it’s culturally acceptable to borrow money, there’s a large stigma associated with being chased by debt collectors.
Once your debt has been passed on to Baycorp, they’ll usually add another large “collection fee”, making it even more difficult for you to pay. Not only that, but they’ll begin hounding you with letters and phone calls as they try to get the debt paid.
Even once you’ve paid the debt, the knowledge that your credit rating has been impacted, and the stress associated with it can make you feel terrible.
As you can see, a bad credit rating can negatively impact your life in a number of ways. And even after you’ve paid the amount you owe in full, a default can stay on your report for up to five years.
You Can Improve Your Credit Score
Poor credit scores happen to people from all backgrounds and walks of life. Sometimes a catastrophe like an illness, divorce, or business failure can leave a once financially healthy person in bad shape.
Luckily, it is possible to improve your credit score in New Zealand.
Prior to 2012, credit agencies could only record negative information about your payment history. This includes credit card applications, bankruptcies, and defaults.
Now, these agencies can record comprehensive (positive) information about your payments. Here’s an example:
Say you’re a student, and you missed a few payments, before picking up some extra shifts at work and sorting out your financial situation. You then regularly pay your debts on time over the next four years.
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The old system would see you penalized for missing your payments, with no credit for getting your life in order and paying on schedule for the past four years.
Now, lenders can see that you went through a rough patch, but then met your financial commitments.
You can reestablish your credit history by:
- Working to clear previous debts (consider taking out a consolidation loan or applying for a payment plan)
- Staying on top of new bills
- Avoiding borrowing more than you can pay
- Regularly checking your credit score
- Speaking with a credit fix company
Have you checked your credit score recently? Leave a comment below and let us know, or get in touch with any questions.