Rebuilding credit after debt consolidation in New Zealand: A step-by-step guide

If you’ve opted to consolidate your debt recently, you might be feeling a lot of relief. If you had too many credit cards, multiple balances on loans and constant worry, replacing that with one debt, one loan and a single payment can make a big difference.

When debt has become stressful and overwhelming, any steps you can take to simplify it and get a strategy in place to clear it can feel very comforting. That’s why a debt consolidation loan is considered an appropriate option by many borrowers who want to get back on track.

But once that’s done, you might be wondering - what next? If your credit score took a bit of a hit when you had trouble with debt, you might have questions about how to rebuild it and start improving your overall financial picture.

Here’s a roadmap to rebuild your credit after debt consolidation and get on the path to recovery, even if you have bad credit.

What happens to your credit after debt consolidation?

If you take out a new loan, it may have a short-term negative impact on your credit rating when the inquiry is added to your credit report. But the short-term dip of another loan can often be more than offset by the long-term benefits of using it to get on top of your debt commitments.

Good credit is built over time by making timely payments on your debts and keeping up with all your bills and ongoing financial commitments. This positive pattern of behaviour can start to rebuild your credit history.

In New Zealand, anyone can check their credit history and credit report by contacting one of the credit agencies – Centrix, Equifax or Illion. This will give you a good idea of what your current picture is and what you might be able to change.

How long does it take to rebuild credit in NZ?

Rebuilding your credit won’t be an instant process, but you should see gradual improvements over time. Here are a few points to consider.

Things that can affect the speed of your credit recovery include your payment history after consolidation. Are you making all your new loan payments on time, as required? On-time payments are key to rebuilding credit. Missed payments can throw up a red flag on your credit history, but a positive payment history will work in your favour.

Credit utilisation can also be a factor. How much of the credit that is available to you have you used? This is sometimes referred to as your credit utilisation ratio and could also relate to any credit card debt you’re carrying.

Having a steady income and budgeting to ensure you can meet your monthly payments and other commitments can really help. A debt management plan could also be a handy tool.

You might have heard people refer to seven years as a key period in credit reporting. But in New Zealand, information normally remains on your credit record for a maximum of five years, if the debt has been cleared. Only unpaid debt might linger longer.

Even bankruptcy will be removed from your file two years after the date you’re discharged, or five years from the date you became bankrupt, whichever is later.

It might help to set realistic milestones for your progress. You might have a plan to achieve a certain improvement within six months, one year or two years.

Sometimes, it’s helpful to have some accountability. Do you have someone you could discuss your financial journey with, and who could help you celebrate your progress?

Step-by-step: How to rebuild credit after consolidation

Step 1: Make timely payments every month

This is the key one to keep in mind and will generally make the biggest difference to your credit. New Zealand has a comprehensive credit reporting system, which means positive factors are recorded on your credit history as well as negative ones.

That means that you can build your credit score by making your payments on time for your new debt consolidation loan – but also when you pay other commitments, such as your power bills, on time. Next time you pay for your broadband, you can thank yourself for improving your credit.

It might help to set up all your payments to go on your payday, or soon afterwards, so that you know the money is more likely to be in your account when it’s needed, and there’s no risk you’ll accidentally spend it and have trouble paying your loan or other bills.

Hopefully, your debt consolidation loan has a lower interest rate, which may mean lower overall payments, too.

Step 2: Create and stick to a budget

Debt consolidation is a great tool that can help you get back on track. But your new loan needs to work with your life. You might find it helpful to have a repayment plan that accounts for your broader budget. Think about your monthly income, your regular expenses, and where your money goes. Is there any way you could trim spending to allow more money to go to paying off your debt?

Your new lender will have considered what you could afford when it assessed your application, but it’s useful to have your own picture of how repayments fit with your living expenses. There is a lot of assistance available to help New Zealanders with everyday money questions. Sorted has a range of online tools, and MoneyTalks offers mentoring to people who need it.

Step 3: Monitor your credit score regularly

You can keep an eye on how your credit is improving while you pay off your new loan by requesting a credit report from one of the country’s credit bureaus. You can do this as often as you wish to monitor your progress.

These are generally free to access and will let you see how the improvement is happening and spot any errors. If there is an error on your report that is dragging down your credit score, you can ask to have it corrected.

Step 4: Keep your credit use low

It could help to avoid borrowing as much as you can from other sources as you work through the rebuild phase. If you’ve consolidated your credit card debt, resist the temptation to use those cards again. Any overdraft facilities that you repaid when you restructured your lending should also be cancelled, if you can.

It’s often reasonable to aim to use less than 30 percent of your available credit across credit card accounts and overdrafts.

Step 5: Build an emergency fund

If you’ve got your debt under control, you probably want to avoid it getting out of hand again. You don’t want to risk undoing all your hard work. One way to help ensure your overall financial well-being is to build an emergency fund you can tap for unexpected expenses, rather than relying on debt. An emergency fund, maybe an amount equal to three to six months’ worth of income, can help you if you hit unexpected expenses or your income drops for a period of time.

It’s not always easy to save money, particularly when cost-of-living pressure is on, but a slow and gradual approach can help you build that safety net over time. You don’t have to reach your emergency fund target immediately, but each month, try to get a little bit closer.

Step 6: Use credit responsibly moving forward

At some point, you might think about using a credit card and other credit facilities again. It’ll be important to ensure you don’t spend more than you can afford, and that you have a process to clear any debt you build up.

It’s generally best practice to pay off your credit card debt each month to avoid paying interest. Take care with multiple debts. The more you have, the more admin may be required to manage them.

Steer clear of high-interest debt if you can. If you worry that you might need a bit of additional help, a financial mentor could be a good option for some personalised guidance.

Common mistakes to avoid after consolidation

There are a few mistakes people often make after going through the debt consolidation process, whether that’s with a debt consolidation loan, an extension of a home loan, or a credit card balance transfer.

Taking on new debt too soon

You might be feeling some debt relief, but that doesn’t mean you’re free to head out and borrow more. A cleared credit card does not have to be used. Buy-now-pay-later, payday loans and credit cards could be relatively easy to get, but they could negatively affect your financial situation.

Closing accounts too quickly

In some cases, credit age can help improve your credit score. A longer credit history can be regarded more favourably, so if you’ve got credit accounts that have been open for a while but are well managed, you might like to keep them around.

Ignoring small debts or your utility bills

Don’t think that, just because these aren’t large, they are less important payments than your car loan or other big debts. They can actually be key to building your credit history and credit score, as we mentioned earlier. They all help build the pattern of your creditworthiness.

Applying for too much new credit at once

Applying for credit can negatively impact your credit score because each credit inquiry is recorded. Do it too often, and you might see your score heading in the wrong direction. Try not to open too many new credit accounts at one time.

When to seek professional support?

If things have become really tough, you might like to seek professional help. There are advisers across the country who can help, whether you’re looking for advice on the right lending solution to help you consolidate your debt and get it under control that way, or you need some support with your budgeting or wider financial picture.

MoneyTalks and Citizens Advice Bureau could be a good first stop if you need some practical assistance with getting your money life on track.

There are also financial advisers who can give personalised financial advice. You might want to find one who can talk to you about your overall financial strategy, including investments and home loan lending, or you might look for a specialist who can help you with a specific personal loan query, such as the team at better finance™. If you’re in a situation where things are really tough, you could talk to your lenders about their hardship provisions.

In New Zealand, all lenders have responsible lending obligations which require them to consider assistance for people who are struggling. That might mean restructuring your loan to make it more manageable for you, or postponing repayments for a period (note you will still be charged interest in this scenario). This is much preferable to having your debt go to debt collectors.

People can make a hardship application when they have suffered a hardship they could not have anticipated, cannot meet their debt repayments, and believe they could if the contract were changed. You need to take this action as soon as you can, though, because you cannot apply if you have been in default for two months or more, or haven’t made four consecutive repayments.

FAQs

Here are some common questions about rebuilding your credit, and their answers.

Will debt consolidation hurt my credit score?

It may affect the initial application, as the credit inquiry will be recorded on your credit report. But over the long term, as you make repayments and get on top of your debt, your credit score should improve.

How long will it take until I can apply for another loan or mortgage?

The right timing will depend on your individual situation. But it’s generally a good idea to take a pause, at least for a while. You could assess your situation and think about what’s appropriate for your circumstances. It’s often easier to borrow when you have a higher credit score.

Can I rebuild credit if I have a low income?

Yes. Making payments on time will help to build your score. As long as you can use your income to meet your repayments, careful budgeting is more important than the amount you earn.

What if I miss a payment after consolidating?

Get in touch with your lender as soon as you can to get back on track.

Debt consolidation is a step in the right direction for many borrowers who’ve had trouble with debt, but rebuilding your credit history and credit score will take time and consistent effort. It’s not something that will happen overnight, but with regular, on-time payments, careful consideration of your overall credit mix and a focus on getting your debt paid, your score should improve.

Ready to talk?

The better finance™ team is here to help with any questions you might have about debt consolidation loans or managing your lending. We are personal loan experts who can help you develop a plan or strategy to achieve your goals and keep your credit score as healthy as possible.