Credit Scores, Credit Reports and Credit Checks - The Definitive 2022 Guide

There has been a lot of confusion when it comes to individual credit scoring, with a lot of wrong information being circulated throughout New Zealand adding to the misconceptions. And because lenders have no incentive to make credit scoring understood (doing so would give consumers more power), we've taken care to put together information that walks Kiwis through the ins and outs of credit scoring. 

First, let's define some terms you're likely to have heard of:  

• Credit History and Credit File: This is a comprehensive list of all of your transactions relating to credit. For example, loans you've taken out and repaid, credit card payments, mortgage information, phone contracts and everything that involves some form of borrowing. 
• Credit Report: Your credit report is a summary of your credit history, which usually includes a credit score (see below). It's used by lenders when they assess your suitability for a loan or some other form of credit. 
• Credit Score:  This is a single number which is based on your credit history - in a way it sums up your credit report into one number. 
• Creditworthiness: This is an evaluation performed by a lender to work out if you're likely to default on a debt, and it's based on credit history and current income.
• Credit Rating: This is not a popular term, but in essence is similar to creditworthiness.
• Credit Reference Agencies: These are companies who collect credit data about you and supply it to lenders when you make a credit application. The main credit reference agencies operating in New Zealand are Equifax, illion and Centrix
  
• Credit Score Providers: These are companies who provide credit scores using the data from one or more Credit Reference Agency. In New Zealand there is one - Credit Simple.​
  

To ensure you appear as attractive as possible to a lender, it’s essential to understand how lenders make their decision. In every assessment, your credit score is only one factor – your application and history with the lender are both very important.

This is potentially the most important factor in any application for credit. In this form, you’ll submit the most sensitive details. This includes your salary, your job title, your employer, your phone number, your address, whether you own or rent your home, your expenses, your debts, your dependents, your assets and the reason(s) for your application. You’ll need to be precise with the details, and make sure everything is accurate – don’t miss a zero or add one by accident. Lenders are assessing your affordability with every detail.

Companies retain data on all customers, current and former, which means any past experience with the lender will be factored in to determine your suitability for whatever you’re applying for now. If you’ve not been a good customer, you may find it more problematic to be accepted - you may also find yourself on your lender's internal blacklist. Conversely, this also means that for individuals with little or no credit history, their existing bank could be more likely to accept applications than other banks who don’t have the customer data. 

The four New Zealand credit reference agencies all work in a similar way – they analyse data and send individual credit reports to any company requesting one. All lenders use at least one agency when they assess your file. This data comes from seven main data points:

1. Electoral roll information: This is publicly available and contains address and residence details. 
2. Account data from previous behaviour: Banks, finance companies, electricity companies and other businesses use credit reference agencies to share your account behaviour. If you’ve been late or defaulted on a payment, this will be added to your file and ultimately negatively affect your credit score. A default is defined as a missed payment, overdue for 30+ days. Even if you have made payment in full after the 30 days, the default stays on your records.​ At any time, your credit data will show what types of credit you currently have, the credit limit, and the name of the lender.
3. Debt Collections: If you've been chased by debt collectors for defaulting on a line of credit, this will be included even if you're repaid the balance in full.
4. Hardship Applications: if you've applied for a financial hardship consideration to any lender, this will be included. 
5. Court records: Have you had a court judgment made against you for unpaid debts? If so, this information will be collected and added to your credit file. If you’ve been petitioned for bankruptcy or under financial restrictions imposed by the Official Assignee, your history will be included. The purpose of court information is to indicate whether you have serious debt problems.
6. Payday Loan applications: A history of applications and/or loans from payday lenders may be a red flag to potential lenders. This is because payday loans are high-interest finance which is seen as a last resort, and suggest you may be a risky borrower.
7. Credit Search data: Your records show any other lenders who have accessed your file, so if you’ve applied for lots of loans or credit cards, this will be evident on your history. 

Many people think everything is on their credit file, so we’ve made a list to disprove the misinformation about what’s not so you can focus better on improving your credit score.

1. Student loans - unless you've defaulted on repayments.
2. Who you're married to or living with - unless you're linked financially to another person, there's no information about who you live with and members of your family.
3. Declined applications - lenders don't see if you have been successful when applying for credit, but if you've been refused on more than one occasion and applied at other lenders, this will be obvious to see as it will contain a number of credit inquiries. 
4. Parking and speeding tickets - speeding ticket are outright excluded, and, generally, parking tickets from private companies are not recorded on your file unless the debt is so great that it has been passed on to Baycorp or a similar agency - our guide to private parking tickets explains in more detail.
5. ​Defaults or missed payments beyond five years - the limit of data is five year, so if you missed an electricity payment back in 2008 your file wouldn't include that.
6. Whether you've requested your own credit file - you see this, but lenders don't so there's no limit on how many times you can request it.
7. Race, religion, marital status, ethnicity.
8. Salary - but this will be a key question in any application for credit. 
9. Savings accounts and investments - savings and investments are not credit products so are irrelevant to credit data, but you'll usually be asked to provide such information on an application.
10. Medical history - any medical conditions you have or have had are not listed.
11. Criminal record - any convictions are not listed.
12. Child Support payments - any data from WINZ is excluded.

It's important to re-emphasise that a credit report serves to assist lenders making a decision, it doesn't make the decision for them. Your application is the most important - if you can't afford what you are applying for, the credit data won't matter. 

Your credit report does influence what interest rate you will be offered. You’ll see interest rates “from 6.99%” from banks and lenders like Harmoney, GEM Finance and Squirrel. However, what you’ll actually pay will be determined by your credit assessment. If you see an attractive interest rate offer, don’t be certain you’ll get it – most people don’t. In fact, the 6.99% offer you see advertised may only be offered to 10% of applicants, i.e. the ones with the best credit profile. It’s not a human right to be lent money, and the market rates are decided by the finance industry who wants to ensure they’re not losing money lending to people who can’t repay.

​If you don’t like the terms you’re offered, your only choices are to accept the offer or make an application with another lender. 

There are four options available, and all of them are free. We'd suggest applying with Credit Simple for its ease of use, followed by Equifax given the number of lenders who use it. If you notice anything that looks unusual, raise it urgently with the credit reference agency and follow it up until it's cleared and/or resolved. 

​Each lender assesses and scores you differently, and there is no transparency in what they actually prioritise. Despite all the inconsistency and uncertainty, there are many simple things you can do to reduce the risk of credit rejection and/or higher interest rates being offered. We’ve outlined 17 tips below to help boost your credit rating.

It’s important to remember that each lender has its own criteria for specific products; you may meet one bank’s loan criteria, but not another even if they’re offering similar rates and terms.

To have the best chance of securing credit you’ll need to be "attractive” to lenders – this means you’ll be low risk with a healthy cash flow to meet payments. The tips outlined below help lenders see you in the best light:​

​Some credit reference agencies will try to sell you a “credit score” – you can get one for free, and your credit report is more important

While Credit Simple helpfully provides a credit score for free, other agencies offer credit scores as an extra paid service.  We take the view that a “credit score” is not a complete representation of your credit quality and ability to get approved. This is because each lender evaluates data differently; for example your application information may have more weight than your credit data for a credit card application when compared to a payday loan application. 
 
Credit Scores - Worthwhile or Worthless?
If you've applied for a credit score from a credit reference agency such as Equifax or Credit Simple, what exactly have you got? Well, firstly you'll get a number. This is anything from 1 to 1000 (in the case of Credit Simple, for example).
 
However it's important to keep in mind any application for credit of any form relies on an assessment of three criteria:

1. Your application details, which covers important details such as salary and your assets, which helps to evaluate whether you can afford what you're applying for. This is a MASSIVE factor in any application, and when you apply for a credit score you don't supply any of those details.
2. Any past dealings you've had with the lender. For example, your bank knows you better than a credit agency, as does your mobile provider and credit card company, which is all information that won't be included in your credit score.
3. The information contained in your credit report - and it's this information that determines your "credit score".

 
A "credit score" misses key application information and will always be based on incomplete information. For example, if you go down to the bank and ask for a mortgage after presenting them with a credit score of 999/1000, they’ll take no notice of it and make you fill out an application with all of your personal financial details. What matters most is affordability.
 
It’s also important to note that different lenders look for different things, so the score isn’t that important anyway. Your credit score simply is an estimate of how risky you are as a borrower.

Should a credit score be ignored then?

• In our view, NO - it’s better than nothing and does give an estimate of your creditworthiness.
• If it's lower than you'd like, you can focus on increasing it with positive credit behaviour. 
• ​You can also challenge anything that you don’t agree with to make sure your history is accurate. 

​Movements in a credit score will come from a range of activity, including opening or closing a bank account, increasing the limit or cancelling a credit card. Lenders will interpret this information differently so none of these examples are necessarily negative, even if they temporary lower your credit score.  For this reason, your credit score is only an estimate of where you sit on the credit spectrum. It doesn’t define you at all.

How a credit score affects your financial options
While credit scores don’t provide the full picture, they work to reduce the risk you take on borrowing you can’t afford. We’ve itemised how credit scores affect mortgages, credit cards, loans, phone contracts, utilities and insurance:

• Mortgages – a poor credit score is almost certain to see your mortgage application rejected. This is because you will likely have a history of defaulting. Lending is difficult enough with the strict CCCFA requirements currently in place.
  
• Credit cards – the better the credit score, generally the higher chance of you being accepted. Your application will decide what card is suitable and the credit limit, but a credit score that suggests you don’t default will be favoured when everything is assessed together.
  
• Loans – your credit score influences your chance of a loan (personal, car or other) being accepted and what interest rate you’ll pay.
• Phones and Utilities – data from mobile contracts and electrical bills are shared with crediting agencies which makes it really important not to neglect these bills. A missed phone payment or late electrical bill could affect a mortgage application later on. A phone contract is in essence a loan, as you get a phone upfront and pay it off over 12 or 24 months etc. For this reason, credit scores are important.
• Car and home insurance - insurance companies do not check your credit history the way a lender will, but they do want to know your credit background to assess whether or not you can pay the premiums on an ongoing basis. 

We wanted to know what lenders from all over New Zealand do with your data. Specifically, how much data are they sharing, who do they share it with, and how does this affect you?

We asked every major lender (banks and other long-term finance providers) to disclose their credit assessment partners. Firstly, we ask each lender if they engaged in Positive Reporting, i.e reporting the type and amount of credit a customer has received and how repayments are going, as an alternative to only sending "negative" reporting such as missed payments. We also asked who lenders send their customer information to and who they request credit records from - either Equifax (formerly known as Veda), Centrix or ilion. This applied to credit card, personal loan and mortgage applications. 

Notes:
​* The ASB and Heartland Bank both stated it uses multiple credit agencies when supplying and requesting customer information