How to raise your credit rating

REBECCA STEVENSON
Last updated 11:25 30/08/2011
DEBT BURDEN
DOWNGRADE: If it can happen to the mighty US, it can happen to you.

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The higher your credit scores, the better shot you have of getting a loan or credit card application approved. Improving your credit scores takes time, but it can be done. Here are some important tips:

Dispute errors. Credit bureaus are required by law to investigate mistakes you bring to their attention and report back to you. Typically, they ask the creditor that reported the past-due information to check its records. If the creditor can't verify the info or doesn't respond, the item should be deleted.

Pay your bills on time. Payment history makes up more than one-third of the typical credit score determination, financial columnist Liz Weston, author of Your Credit Score, says, so paying bills on time all the time is essential to maintaining good scores. If you're forgetful, consider setting up automatic payments through your bank.

Pay down your debts. Lenders look at how much of your available credit on cards and credit lines you are using. If you are maxed out or close to it, lenders could assume you're on the financial edge and not lend you money.

Keep credit cards and other revolving accounts open. You may be tempted to close old accounts you're not using, but that won't help your credit scores and may actually hurt them. It reduces the amount of your available credit, which can lead to lower scores.

If it can happen to the mighty US, it can happen to you.

Financial markets around the world were sent reeling from ratings agency Standard & Poor's (S&P) decision to downgrade America's credit rating from its top ranking, AAA, to the rather less illustrious AA+.

Rating agencies like S&P analyse risk, whether it is for a country like the United States or a corporate, and grade debt according to the ability of the subject to repay the debt.

In common parlance, S&P yanked the Yanks' top credit rating because it believed the US had become more of a credit risk.

You would have had to be living somewhere with no cell or internet coverage to not have noticed the resulting market fall-out, and analysts' predictions the downgrade will ratchet up the US's cost of borrowing as lenders build in padding to cover the perceived increased risk of lending.

For you and me, a negative credit report has much the same effect. A failure to pay our bills and the acquisition of bad debt leads to a poor credit rating and a tainted history that can follow you around. It makes us a credit risk which can lead to traditional lenders, like banks, giving you a wide berth - and those that are willing to take you on may make you pay through the nose for the privilege.

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Statistics released this month by the Ministry of Consumer Affairs show that most of Kiwis' debt is borrowing for housing. Our mortgage borrowing has more than doubled since the early 2000s to about $160 billion last year; a rising trend which the ministry says reflects the increasing cost of housing.

In contrast, consumer loans including car loans has risen far less, oscillating between just under $8b to a peak of about $13b in 2007 before falling back in 2009, likely in response to the recession.

Credit card use has increased slightly as a percentage of consumer loans, peaking in 2010 at more than 40 per cent of total consumer loans.

The vast majority of consumer lending is done by banks, with "all other non- bank lending institutions" a distant second, followed by credit unions and building societies.

But how much of this borrowing is becoming problematic for us, and what do debt defaults or even a late loan repayment mean for you and your credit history down the line?

The big banks, as the biggest lenders to us, have booked their fair share of bad loans from Kiwi consumers over the past few years as they front-footed the cost of our failure to pay our debts.

This proactive approach means most are now seeing their impaired loans reduce, but not Kiwibank who recorded an increase in impaired assets, or loans gone bad, of $26m to $90m for the year ended 2011 which analysts blame on its failure to quickly identify bad loans.

The New Zealand Federation of Budgeting Services reckons the average Kiwi seeking financial advice from its network of offices has more than $30,000 of debt of which about $5000 is overdue and costing the borrower more every day it remains unpaid. The service also reports that the average debt per client it is seeing has increased markedly, 63 per cent, between 2007 and 2010.

The overdue debt should be the biggest worry for consumers as it may have long- term ramifications.

You may not know there is a wealth of information being collated about your borrowing habits, down to every credit check that a lender or anyone else makes.

It's called a credit file and anyone who has been "credit active" in the last seven years will have one. On your file are the basics - name, age, address, who has been enquiring about your credit history, credit defaults and repayments - including late repayments - and any judgments made against you for debt in the district or high courts.

A lender will likely access your file in order to determine whether or not they want to lend to you.

Therefore, it makes sense to suss out whether you are like the US and have credit issues, and the best way to do this is to see your file in all its glory.

Credit reporting agency Veda Advantage's website says you should always check out what is on your file. Your file can be requested from a credit agency like Veda for free, and should be posted to you within a couple of weeks of your request.

Got an overdue Sky bill from a previous flat? That could well be on there, along with a host of other bills you have forgotten about, or conceivably bills that you may not be liable for.

So you forgot to pay a Sky bill, no biggie, right?

These credit black marks are on a scale of seriousness, says Wellington mortgage broker Eddie Ellison, who often deals with clients with damaged credit.

A Sky bill is at the minor end of the scale going up to a default - failure to pay or make repayments - on a credit card bill or loan at the upper end, Ellison says.

Even the minor defaults, like traffic fines, can come back to haunt you when you go to take out a mortgage.

"If you are close to borderline for getting a mortgage, credit problems could push you over, " Ellison says.

Banks over the past couple of years have been looking to lend to only those who are squeaky clean, he says.

The thing to remember is that defaults and late repayments hang around on your file and become part of your history. Just because they are out of sight and mind to you, doesn't mean they aren't visible to a lender.

Veda says payment defaults and collections - overdue accounts - remain on your file for five years even if you repay the money.

If you are really in the financial doo doo and have to apply for insolvency - that stays on your file for four years from the date the bankruptcy is discharged. Even a credit application or credit enquiry stays on your file for five years.

But even when that time limit runs out, Westpac's Roger Bramley says, there is no "magic number" or future date when all previous financial misdemeanours will have disappeared.

What you have to do is re-establish a good credit history, Bramley says. The absolute worst thing you can do is ignore your debts, he says.

Re-establishing your good credit character should include clearing any previous outstanding debts, perhaps by consolidating numerous loans and debts under one loan, and making sure you stay on top of any new bills you have. Whatever you do, don't make it worse.

While it may take years to clear that outstanding debt, it shows a positive history of consistent repayment to future lenders, Bramley says.

Another option is a credit fix company, Ellison says.

Basically, these companies charge to analyse your credit file and work on your behalf to remove any incorrect negative credit claims. One way these companies do that is by going back through the process a lender or disgruntled creditor has used to lodge a claim against your name.

If they find any loophole, failure in the process or technicality to challenge the claim - they will. Veda says payment defaults may be listed only once steps have been taken to recover the debt and the credit provider must have requested either in person or in writing that the borrower pay the outstanding amount.

While Ellison says you can debate the morality of using a technicality to get rid of a debt, this approach can work.

If you don't want to pay for this service, you can try yourself to get any credit claims you believe are incorrect taken off your file but you will need to persevere and liaise with the credit agency or claimant.

The sooner you get on to this the better, Ellison says.

Then of course, there's the old prevention is worth an ounce of cure argument, and this is true of debt.

New Zealand Association of Credit Union's Jonathon Lee says you have to talk to your lender as soon as possible if you feel your debt is becoming a problem.

"Don't talk to a loan shark, " he says.

Responsible lenders will work with you to juggle your repayments, Lee says.

Halting the slide at this point, before you get into arrears, is the best thing you can do for your future credit history.

- BusinessDay.co.nz

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