Prospective buyers in 2023 are facing a different harsh economic environment - higher interest rates and increased cost of living pressures - but what could torpedo their chances of securing their own home is their credit rating.
Kiwis who are unaware of their credit history could find themselves losing out when it comes to getting a home loan. Most adbults will have a credit report, and for the country's lending institutions these reports will have a huge bearing on loan approvals. The reports can also have impact on rental applications and job offers.
Kiwis can find out their credit history for free from the three credit agencies that hold financial information in New Zealand - Equifax, illion, and Centrix. The
The three credit agencies collect financial information on nearly every adult in New Zealand, analyse it and produce a credit score. The lower the score, the harder it is to borrow. It can also affect getting a job, securing a tenancy, or buying insurance because employers, landlords, and insurance companies can access the agencies’ records.
Start your property search
“The agencies charge banks, lenders, employers and other permitted organisations to view that data. The banks use the data to make better lending decisions," says Angus Luffman, Equifax NZ managing director.
The credit agencies collect their data from banks, finance companies and other lenders, telecommunication providers, utilities providers. The terms and conditions for consumers of loans, utilities accounts, for example, include permission to share individuals’ data, within limits set by the Credit Reporting Privacy Code 2020.
Prospective buyers can check obtain their credit score from one of three credit agencies. Photo / Fiona Goodall
The data is both “negative” - such as credit enquiries, defaults and bankruptcies - and “positive” - such as on-time payments of utility bills.
When home buyers first find out how much information is held by these agencies about them, and how it’s used, it can come as a shock. That realisation usually comes when they are declined a loan or mortgage.
Locked out of mortgages
Banks don’t want to lend to people who have a track record of bad payment. It’s an indicator that the person may not be good at making mortgage repayments on time. As a result, defaults and a history of late payment can lock them out of buying a home until they can prove changed ways.
Once declined, buyers who then seek copies of their credit files often find they have a history of late payments on utilities accounts, or defaults they’d forgotten about. Just because the company is no longer chasing for repayment, it doesn’t mean the debt is forgotten.
The types of information held in credit reports can include:
1. Identity, and aliases, last reported and previous addresses, as well as date of birth.
2. Applications for credit and utilities accounts. Even if shopping around to get a better deal the fact that there has been a credit enquiry shows up. Too many and it might suggest the person is under credit stress or has been declined.
3. Balance transfers. These also show up because they are applications for credit.
4. High interest payday loans and quick finance applications.
5. Late payments and ongoing arrears.
6. Defaults over $120 where the payment has been overdue for more than 90 days.
7. Collections data and collection agency defaults.
Credit card debt can turn a buyer's house-buying dreams into a nightmare. Photo / Getty Images
8. Open credit accounts. This includes credit cards, store cards, and other accounts that are not currently being used.
9. Bankruptcies and No Asset Procedure insolvency. The No Asset Procedure is a type of low-level bankruptcy where individuals can wipe away up to $47,000 in debt.
10. Company directorships.
11. District and High Court judgments for unpaid debts.
12. Details of stolen identification are recorded on the credit report. So too is being a victim of fraud.
13. Buy Now Pay Later (BNPL). BNPL is hugely popular in New Zealand. In theory it’s not credit if paid off in time.
“As well as holding data, the agencies can suck in data from other permitted sources for searches when requested,” says Centrix managing director Keith McLaughlin. The agency doesn’t see the data, but passes it to the bank or lender requesting the report.
“The credit bureau is restricted by the Credit Reporting Privacy Code as to what data we can hold. We pass through to MOJ [Ministry of Justice] court fines and search their records. If there is a match this is recorded on the credit report but the specific details are not provided.”
Likewise Centrix can pass through property ownership information from CoreLogic. And it can link individuals with companies they own through a director search.
“The reason for that is the behaviour of the company [often] replicates the behaviour of the director who’s in control.” Companies aren’t covered by the Privacy Act, meaning consent is not needed.
Don’t believe what you read on social media
There is a lot of misinformation around about what the agencies hold or don’t hold. Misinformation, says Luffman, includes old chestnuts such as library fines being held by credit agencies. They aren’t. Likewise parking and speeding fines don’t show up because they’re not debts.
Other details not held include:
1. Criminal record. Convictions aren’t listed, although fine defaults may be.
2. Student loans and child support, providing they have not been sent to collection agencies.
3. Details of who the person is married to or living with, although if they’re applying for joint credit both people’s files would be accessed.
4. Declined credit. Only applications are listed, although too many count against a person’s credit score. They may also suggest the person has been declined.
5. Very old defaults or missed payments. Data is not included beyond five years. So missed payments at an earlier time in life don’t count.
6. Salary details and medical history. This type of personal information is not included.
7. Savings and investments. Credit files have to do with credit and debt, not how much you have saved or invested.
Clean up your credit act
Many first-home buyers need to clean up their credit in order to get a mortgage. To do that, the first step is to apply online for copies of credit reports from all three agencies, which each may hold slightly different sets of information. Check each report carefully to ensure it is accurate.
Banks will assess your ability to repay a loan based on your credit history. Photo / Fiona Goodall
Unless the data in an individual’s credit report can be proved to be wrong, it’s impossible to remove. It’s relatively rare to prove unless there has been fraud or identity theft. “We don’t get a great deal of mismatching, because it’s done very carefully,” says McLaughlin.
Where the data is wrong, people should contact both the creditor and the credit reporting agency to get it corrected.
In the case of fraud or stolen ID, contact one of the agencies, which will share this information with the others, says McLaughlin.
Where the defaults are correct, they can be written off if the borrower repays the debt. Many a landlord has had an old tenant pay off debts for this reason. Once repaid, ask for the default to be removed.
Insolvency is one of the most material adverse impacts to a credit score, says Luffman. Once discharged from insolvency, people should check that this has been updated on all three agencies’ files.
Home buyers can also clean up their credit report and raise their score by always paying all bills on time. Luffman says other positive steps to take to improve a credit score include closing down unused accounts. “If someone has an open credit card or personal loan, and they’re not using it, the best action you can do is to close it,” he says. “Closing an account with a good record is actually very good for you.”
