Many Kiwis don’t often think about their credit ratings, or the potential amount a bad credit score could be costing them. Here, Canstar explains how it can pay dividends to understand this important number.
Designed to offer an indication of an individual’s creditworthiness, a credit score is a number between zero and 1,000 which shows your bank how likely you are to meet your financial obligations.
What is a good credit score?
Most New Zealanders have a credit score that lies somewhere between 650 and 768, which is considered average, says credit bureau Centrix.
A score at that level means you’ll be eligible for standard credit cards, loans and interest offers, however, a score exceeding 845 is considered excellent, and this Centrix says should make you eligible for the very best interest rate offers and services.
Your credit score is calculated from a deeper analysis known as a credit report, which is undertaken by one of the four New Zealand credit rating bureaus; Equifax, illion (formerly Dun & Bradstreet), Credit Simple and Centrix.
What information is collected?
In 2012 a system called Comprehensive Credit Reporting (CCR) was introduced in New Zealand, with the aim of offering a more balanced view of an individual’s credit history.
Previously, only credit enquiries (enquiries as to personal credit history by a financial institution for the purposes of lending) and default notices were visible to credit rating bureaus, but in the last seven years this has extended so personal information relating to accounts such as credit cards, loans, utilities and telecommunications is now visible.
Credit bureaus use seven points for data collection, these are:
- The electoral roll
- Account information; banks, loans, utilities
- Debt collections
- Benefit applications including hardship
- Court records
- Other lending applications including third-tier payday lenders
How your credit score affects what’s on offer to you
Typically risk adverse, banks and other financial institutions use credit scores to assess the risk of those they are lending to.
People who submit attractive lending applications paired with a good credit score are usually the first to receive attractive interest rates for things such as home loans, credit card purchases and personal loans.
Unfortunately, the most lucrative customer for a lender is the one who misses payments and finds themselves in arrears. These borrowers are usually charged higher interest rates, which stack up over time, and if left unpaid can negatively affect credit scores further.
How do I improve my credit score?
If you have found your credit score to be below 600 and you want to change it, the great news is, you can start today.
The advent of Comprehensive Credit Reporting has enabled credit bureaus access to monthly information, which means that good behaviour this month can start to make a small difference straight away.
5 tips to improve your credit score
- Active management: Check your score regularly to understand any changes; this is especially important to avoid identity theft and negative behaviour through linked accounts (with a spouse or flatmate)
- Pay on time: Use direct debit facilities or calendar alerts to ensure you’re on top of payments
- Correct details: Details showing on your credit report should be correct and up-to-date, contact the bureau if you notice information is out of date
- Avoid third tier lenders: Aside from charging high interest rates, payday and quick finance lenders are a red flag to other financial institutions
- Low eligibility credit cards: Cards like this are designed for those with a chequered credit history, they carry a very high interest rate, but the good thing is that you can start to demonstrate positive credit behaviour by spending a little (say, $25) and paying it back in full every month.