Frank Newman: Credit scores and simplicity

How good is your credit score? Checking is simple, and free. All you need is some details from a driver’s licence (or passport) and a click on the website creditsimple.co.nz. It literally takes less than a couple of minutes.

A credit score is a number between 0 and 1,000 that indicates how credit-worthy you are, and how likely you are to pay your bills on time. Most credit scores are between 300 and 850. The higher the score, the better your credit rating is. A good score is more than 500.

The higher the score the more likely it is that you will be able to get credit from suppliers, lower interest rates from banks, and better deals from telcos, insurance companies and utility companies.  A bad score can lead to companies being reluctant or unwilling to give you credit, or charging a higher interest rate.

As well as viewing a credit score, Credit Simple provides a credit report, which is a history of bill payments, any defaults, court judgements, and how much credit a person has (such as a mortgage or credit cards).

Credit reporting has until recently been based on "negative credit events" - payments not being made. But it is undergoing something of a transformation with two major banks now providing "positive" information to the big credit ratings agencies, and the other major banks likely to do so before the end of the year. That means good money habits like paying bills and loan repayments on time are now recognised and can influence a person's credit score. That is providing greater differentiation between those with good and bad credit records, and giving banks a greater ability to tailor their lending to risk profile. 

Virtually everyone has a credit score, even though they may not know it, and everyone should know what it is. Those with a good credit record can use it to their advantage, like using it as a basis to negotiate a lower mortgage rate from their bank, or tenants applying for a rental could use it to show they are a low credit risk - after all, a person who is responsible with their money is more likely to be a responsible tenant.

Given how simple it is to obtain a credit score, it is surprising how few landlords do so when vetting potential tenants. It's also surprising how many businesses give credit to customers without first undertaking a credit check, only to end up regretting it later.

Staying with things simple, a low-cost KiwiSaver provider called Simplicity is offering something new to the KiwiSaver scene: low fees and ethical investing (its investments exclude tobacco, landmines, cluster bombs and nuclear weapons!).

Their website (simplicity.kiwi) states the fees are $30 a year plus $3.10 for every $1,000 in an investor’s account (0.31%), for all of their fund types. That compares to fees that typically average between 1.07% for conservative funds to 1.45% for growth funds. Their promise is to keep their fee to at least 50% less than the industry fee average, and to continually lower fees over time as the fund grows.

According to Simplicity, a person making a $50,000 investment would be better off by $13,000 after 10 years as a result of the lower fees. That's very significant when taken over a lifetime of saving.

While ethical investing is not new to New Zealand (and has gained little traction it has to be said) the low-fee message seems to be resonating. Since August last year they have gained just over 5500 members and have over $100 million under funds management.

No doubt other managed funds will argue that actual performance is more important than fees. They are of course right. The test will be whether Simplicity can achieve returns at least as good as the other high fee paying funds, but at this stage there is no reason to assume their returns will be lower, as their investment approach is quite typical.

Here are some interesting facts and figures about KiwiSaver:

• As at March 2017, the total value of KiwiSaver funds under management is was $38.8 billion. 
• The six largest KiwiSaver providers currently have over 85% of market share.
• About 55% of the funds are invested in fixed interest securities, 40% in shares and 5% in property. 52% are in overseas investments.
• ANZ has the largest market share with $10 billion under management. ASB is the second largest at $7.1 billion.
• In the year to the end of March 2016, 175,000 members switched from one KiwiSaver provider to another. The amount switched was just over $2 billion.

If you want to learn more about the performance of KiwiSaver funds, have a look at fundfinder.sorted.org.nz.

Frank Newman writes a weekly article for Property Plus.