Author Katrina Shanks, CEO Financial Advice NZ
Article originally published in

I don’t know about you, but the summer holiday period is the most expensive time of year for our household.

Maybe you bought tickets to bring the kids home from university (like I did) before plunging into the expense of Christmas presents and lunch on the big day, and then either went camping, rented a place at the beach, or stayed at home where you entertained the kids. Whatever you did, there’s always added pressure on most household budgets.

Thankfully (from an expense point of view) that’s behind us for another year, but now, for many, there’s the issue of dealing with the aftermath: paying down those credit card purchases or maybe the loan taken out to cover it all.

However you tackle it, the usual rules should apply if you’re to avoid adding unnecessary costs to your borrowing or credit: make required payments before the due date so you avoid interest penalties. In the case of credit cards, if you pay off the balance within 55 days, not only do you avoid penalty payments, you avoid any interest at all!

Either way, you want to avoid getting a bad credit rating – because that’s what will affect your ability to get a loan or credit in the future.

You’ve had credit if you’ve ever had a loan, asked your bank for an overdraft, used a credit card, needed a payday advance, or bought something on hire purchase – including interest-free deals from stores.

To get credit or a personal loan, you must be able to show you can repay it. Lenders consider many factors when considering approval, including your income, savings, level of debt, repayment history, and your credit rating.

Even though it’s just one factor, your credit rating is probably the most important of these because it takes into account several things, including how promptly you make payments on loans or bills, any defaults, and how many times you’ve applied for credit.

So what’s a credit rating and how does it affect your ability to borrow?

After that, every time you apply for a mortgage, car finance, hire purchase, insurance, or credit for an electricity, gas or phone bill, the credit reporting companies will get a report from the lender or credit supplier on the amount borrowed and credit limits, as well as monthly repayment updates.

These details will go onto your file to be used by organisations to check on your credit worthiness when you apply for future credit.

Information about your repayment history can be kept on your record for up to two years, but unpaid debt – where the lender tried to recover the money you owed – can stay on your record for up to five years, even after you pay the debt in full.

Your credit record will include a score between 0 and 1000 that enables credit providers to quickly assess your credit risk. The scores are calculated using the information contained on your credit file. One company describes the score as focusing “on the facts related to credit risk, rather than on subjective matters such as personal opinions or preferences”.

Here’s an example of how a bad rating can affect the interest rate you can borrow at: for a $2000 loan repaid over two years, someone with an “excellent” credit rating may pay interest of just 8%, or $171, over the term of the loan; an “average” credit rating may mean 25% interest, or $562; while someone with a “bad” credit rating could pay an interest rate significantly greater than that.

It’s important to know your repayment history can be provided by and accessed only by certain organisations, including banks and finance companies, debt collectors, some government agencies, telecommunications providers, retail gas and power suppliers, and insurers. Others, such as landlords and employers, can access your credit record only if you give them permission.

You can check your information for free at any time from each of the three credit reporting companies, Equifax, Centrix, and illion. If it’s wrong – such as containing reporting credit accounts you never applied for, payment defaults you didn’t know about, or credit inquiries you never approved – can ask for it to be corrected. It’s important to do so because it may affect your ability to get credit.

It’s possible to get a loan if you have a bad credit rating, but because you would be seen as a risky customer, your choice of lender will be limited and you may be forced take out a loan with higher interest rates, higher fees, a shorter duration, and have to offer more security.

So, how can you improve a low score so you can access lower interest rates more easily?

  • start by paying your bills on time and keep doing that
  • set yourself a budget and keep to it
  • if you have trouble staying current with payments, contact your lender sooner rather than later
  • settle any outstanding defaults as soon as you can. A default will stay on your file for five years, but the sooner you pay if off, the faster its impact will reduce
  • apply for credit only when you really need it. Making repeated applications can have a negative impact on your score because it may be judged as an increased risk. And definitely avoid payday loans and truck loans


If you can show you are able to improve your repayment behaviour then the lower your credit rating will be, the better risk you are, and the better your chances are of getting a better deal with providers, lower interest rates, extended credit limit, and of getting loans approved faster.

Personally, I’m quite curious as to what my credit rating shows so I’ll be inquiring to obtain mine. It’s also a good prompt to start up direct debits so I don’t accidentally miss any monthly payments that may be due.

As always, if you have any doubts, seek advice. Financial advisers can guide you on your best options for your financial future.