A bad credit score is more than just a number; it can be a major roadblock on your path to homeownership. Whether it's because of missed payments, defaults, or outstanding debts, a low credit score signals risk to lenders, making it harder to secure a mortgage. In some cases, it could mean higher interest rates, stricter conditions, or outright rejection.

Understanding how your credit history is assessed, and what thresholds matter can help you avoid surprises when applying for a home loan.

What is a credit score?

Credit scores are based on your financial behaviour over time including your use of credit cards, personal loans, car finance, overdrafts, and even everyday payments. The scores typically fall between 0 and 1,000, and a strong credit history where you've borrowed responsibly and repaid on time will help to boost your score. On the other hand, missed or late payments, defaults, and fines can all drag your score down.

Lenders use your credit report to assess how risky you might be as a borrower, which influences not just whether you'll be approved for a loan, but also how much you can borrow and the interest rate you’ll pay. Essentially, your credit score is a snapshot of how well you’ve managed debt in the past, and how likely you are to meet repayments in the future.

What is considered a bad credit score?

There are three main credit reporting agencies in New Zealand, and while their scoring systems may vary slightly, the rule of thumb is simple: the lower your score, the higher the risk you are in the eyes of lenders. Vega CEO Harry Ferreira says in his eyes, generally anything below 300 is considered bad.

“This number demonstrates that you’re probably not sound at paying your bills on time, you've maybe missed some credit card payments, and you've had consumer finance balances for extended periods of time.”

On the flipside, Ferreira says a strong credit score is anything upwards of 650.

“That demonstrates to the funder a good ability to repay debt. The better you behave with your debt, in terms of not missing credit card payments, not missing house payments, and everything in between, the stronger you are and the better your credit score.”

What are the main contributors to a bad credit score?

Ferreira says to get a credit score; you first have to have credit.

“So that’s things like house payments, credit card payments, personal loans and consumer finance payments. Where it goes bad is if you miss these and you have judgements against your name, or collections where a collections agency has gone and collected debt on behalf of another company.”

“An example of this would be if you bought a car or a TV on HP and you didn’t make a single payment, so they referred you to a collections agency.”

Ferreira says speeding fines and toll road payments also contribute to your credit score.

“That could be the fact you have 50 speeding fines and 50 parking fines, and you’ve made no payments, so they all get sent to recoveries.”

“IRD arrears is another one for small business owners that can really hurt too.”

But Ferreira says to get to the point where the bank shuts you out of any mortgage would have to be the culmination of years of bad behaviour.

“It’s not massively common, but we do see it.”

What can catch you out?

Ferreira says there are some payments that people often shrug off not realising it can severely affect their credit score.

“It basically counts in every circumstance in which you have to pay money because when someone has sold you something they've entered into a contract with you.”

That means things like your phone bill and gym membership can also affect your credit score. But Ferreira says when things get tough, communication can help to salvage your score even if you can’t make any payments immediately.

“So if you went to your gym and said look, I know I committed to this for $1,500 for the year, but I lost my job and I can't pay it - you could help to avoid it from going to a collections agency.”

“Every company will come up with a plan to try and help you through that process. No company will say if you don't pay by this date, you're gone. But a lack of communication is a strong driver of things ending badly.”

Something else to keep in mind is that having lots of checks run on your credit history can make it look like you’re taking on a lot of debt. For example, if you’ve been shopping around for a car, you visit five dealers, who all take your licence and do a credit check. However, having so many credit checks done in a short period of time can lead to lenders turning you down.

Other things that can also affect your credit score include insolvency, applying for multiple sources of credit in a short period of time, hardship applications, or quick finance applications.

What should I do if I have a bad credit score?

Any default will stay on your file for five years, but over time the impact of the default will reduce.

Ferreira says there are some things that you can do to try and improve your outcome.

“Firstly, communicate. Secondly, if there are things in your credit score that are standing out, like a judgement or collections, building a robust explanation for that is a great thing to do.”

This could be as simple as explaining that you couldn’t make your repayments due to something legitimate like redundancy.

“This is a very good explanation. A banker may then ask you to show them your contract for your new job which might have a much better redundancy clause and then all of a sudden, you might still have a poor score, but you've got a good explanation for why it's there.”

But Ferreira says just managing your money poorly won’t be enough of an explanation.

What if the main banks won't lend to me?

Ferreira says non-banks; second tier lenders and private funders are all options if the main banks decide not to lend to you.

“The non-banks are slightly more lenient with a good explanation, but they cost slightly more. So, where you may be getting a two-year rate around 5%, that number may be closer to 7% with a poor credit history.” The best way to be prepared for any outcome is by checking your own credit rating first - especially if you’re preparing to apply for a loan.

“Everyone has a legal right to request information held about them by a credit reporting agency. It’s free to check your rating, but if you want the information quickly there may be an additional fee.”

The easiest way to access the information is by contacting credit reporters directly. There are three of them including Centrix, Equifax and Illion. When you receive your credit report, it’s important to keep an eye out for anything you don't recognise, or think is wrong and If you find errors, there’s three steps to follow to get them corrected.

1. Check your credit reports from the other companies.
2. Report any errors to the credit reporting companies.
3. If the credit reporting companies won't act, but you think it's a genuine error, you can complain to the Privacy Commissioner.

A credit score doesn’t define your financial future, but it can certainly shape your options in the present. Whether you're aiming for home ownership or simply looking to access better lending terms, maintaining a healthy credit history puts you in a stronger position.