Improve your bad credit in 5 easy steps

We're going to walk you through the steps you need to take to improve your bad credit and start building a healthy and stable financial future for yourself and your loved ones.

Turning your bad credit around starts with applying to get a copy of your credit report followed by an in-depth analysis of your current financial situation and, we're going to show you how.

A willingness to create and stick to a budget that will ensure your debts are repaid in full is absolutely critical to success. In this article we dive deep into what it takes to completely turn your bad credit around and live a debt-free, financially stable and thriving life.

What does a bad credit score look like?

Your credit score is typically a three-digit number from 0 to 1000 and any score that is above 700 is considered good. If your credit score drops below this number you’ve entered the bad credit zone. There are three credit bureaus in New Zealaland and these are Centrix, Equifax and Illion.

What causes a bad credit score?

There are a multitude of reasons that someone’s credit score will drop. The first has to do with errors on your credit report. These can be incorrectly captured items or fraudulent additions. We will take a look at how to get rid of fraudulent and incorrect items on your credit report a little later.

The next common reason for a low credit score is applying for multiple loans at the same time as this results in multiple credit searches on your name which lowers your score. It is always best to rather use a loan comparison site to compare.

Switching power providers may also affect your credit score but this depends on the agency you’re looking at. If you cancel credit agreements all of a sudden, this may also negatively impact your credit score. Finally defaulting on credit agreements and having the creditor take action against you to recover their money will, obviously, drop your score.

How bad is bad credit?

Having such a poor score will affect all of your financial decisions and options and if you need a loan, you may either have to fork out three times more in interest or, your application may decline outright.

From buying a home and car to getting a personal loan or credit card, your credit score is the primary tool creditors use to gauge your risk profile.

Step 1) Get a copy of your credit report & dispute errors

Before you even sit down and start to budget, make an application to obtain a copy of your credit report from one or two of the country’s credit reporting agencies.

Your credit report will contain a summary of all your credit history and information, both good and bad and is the figure that lenders and retailers use to determine if you qualify for their products as well as the rate that they will apply to these products.

Once you obtain this report you can analyse it to find out if there are any fraud or errors present. If so, you must write to or contact the credit bureau and request these to be investigated.

These credit bureaus are obliged to do so once you notify them of errors and fraud and once these items are deleted your credit score will benefit substantially.

How to get a copy of your credit record

There are three major credit bureaus in New Zealand. These are Centrix, Equifax and Illion. All you need to do is visit their respective websites and apply for a copy of your credit file. Charges may apply but you are entitled to a free copy at least once a year provided you wait the 20 working days period it can take, so make use of this.

Step 2) Analyse your current financial position

In order to analyse your financial position you must be able make a list of all of your debts and expenses as well as your monthly income. When it comes to listing your debts you need to be very specific and write out the total amount due, loan term, interest and all the fees you’re being charged.

You should also make a list of all your debit orders such as insurance and a mobile phone contract. Use a spreadsheet to list all of your expenses for the last 6 months and total all the columns. This will enable you to get a very accurate idea on how much you’re spending every month and most importantly, where you need to cut back.

Step 3) Cut back on non-essentials

Once you’ve listed a minimum of 6 months worth of past expenses you can now find areas to cut back on. Perhaps you’ve been spending too much on food and dining out? Perhaps your rent is too expensive and it may be time to downscale to a more affordable housing option.

You must scrutinise each and every expense and make sure that you reduce these as much as possible so that you can free up income to repay your debts on time each and every month.

Step 4) Budget & save like a financial expert

Budgeting involves looking at your spending and deciding how much to allocate to each expense. It allows you to ensure you have enough money to tackle outstanding debts and overdue bills to turn your bad credit around. You can download an app on your phone to help you create a budget or just make use of an Excel spreadsheet.

Once you’ve completed step 3 and have cut back on all the unnecessary expenses that are using up your income you may have extra money available. You can choose to either repay a loan with a low balance to get it out of the way or you can choose to allocate the extra cash to the highest interest debt such as your credit card.

Whatever you decide to do, remember that suddenly cancelling multiple loans will not be good for your credit score but, may help you get out of debt quickly.

Step 5) Automate bills & repayments on loans

Late and missed payments may be a result of mismanagement and not a lack of funds. If this is the case it’s crucial that you automate the repayments on your bills and loans, be it a personal loan or credit card repayment.

Automation ensures that you don’t forget to make a repayment and will go a long way to turning your credit around. If you cannot manage the loans and are struggling to keep track of them you may want to consider consolidating your debt as this will merge all of your smaller debts into one large personal loan or home equity line of credit.