Digging your way out of a bad credit rating

Having a good credit rating is important if you want to borrow money.

A good credit rating allows you to make use of a range of financial options such as taking out a mortgage or loan, and owning your own credit card. Conversely, a poor credit rating can limit your options.

Defaults will remain on your credit record for five years, while missed payments will remain for two years. You may also be affected overseas if you have a bad credit rating in New Zealand.

Fortunately, you're not stuck with a bad credit rating and there are a number of practical steps you can take in order to improve it. Rather than simply ignoring your debts, the key is to re-establish a good credit history. The first step is to request a copy of your credit report from a credit bureau.

Credit reporters are required to provide individuals free access to their own credit information. The specific steps to credit repair depends on what's actually on your current credit report. Reviewing your report will highlight where the negative information is coming from, and indicate where your attention should be directed.

Credit reports also have a tendency to contain errors and, with ID fraud increasingly being committed in New Zealand, it's important to be vigilant in monitoring your credit information. Credit bureaus are required by law to investigate mistakes you bring to their attention and report back to you. If there's an error or the creditor can't verify the information, the item should be deleted.

If the bad marks on your credit report are the result of outstanding debts, repay these as quickly as possible. The first payments should be those for which you're paying the highest interest rates.

Paying bills on time is essential to maintain good credit scores. Therefore, it may be a good idea to set up automatic payments through your bank. This will ensure that, even if you forget, payments will continue to be made and your credit rating won't suffer.

Once you've repaid outstanding debts it may be time to re-evaluate just how much you're borrowing. Lenders are unlikely to lend you money if you're maxing out credit cards or operating close to the full capacity of available credit lines. If this is the case, lenders could assume you're on the financial edge and be reluctant to lend.

While it may seem like a good idea to close old accounts and throw out all of your credit cards, it's unlikely to result in any drastic improvement in your credit scores, and may end up hurting them. Severing credit lines reduces the amount of your available credit, leading to lower scores.

An alternative is to come up with, and stick to, a realistic budget. There are several non-profit organisations around that can help you with budgeting advice. Budgeting is a vital instrument to ensure that you live within your means and don't fall into the trap of relying on money that you simply don't have.

It may take a while to clear outstanding debt and see any discernible improvement in your credit rating. Having a positive history of consistent repayment to future lenders, however, will go a long way to deal with an existing bad credit rating and ensuring that you're not stuck with it.

If you're unsure about entering into a credit agreement or digging your way out of a bad credit rating, get independent advice (from your lawyer or other professional adviser) to have the implications of any credit contract pointed out before you sign.

Rachael Robertson is a partner in Christchurch law firm Corcoran French. Information given in Your Law is not a substitute for legal advice.

Sunday Star Times