When applying for a personal loan or mortgage, your potential lender will run a credit check. This involves a full credit report, including a credit score.
The strength of your credit score could determine whether your loan is accepted, and how generous your lender is with the interest rates on offer.
So, what is a credit score and, more importantly, what is a good credit score?
What is a credit score?
A credit score is a number between 0 and 1000 that indicates how credit-worthy you are. How credit-worthy you are is based on your credit history, which is detailed in your credit report.
Your credit history covers all forms of credit, including personal loans, credit cards and utility company accounts, such as electricity, broadband and mobile. Any serious repayment defaults are recorded on your credit report, and can impact your credit score.
And, in turn, your credit score impacts your borrowing power. If your score is high, your custom will be more readily accepted by banks, telcos, lenders and even insurance companies.
If your score is low, you could find your application rejected, or if it's accepted you could pay higher interest rates.
What's a good credit score?
There isn’t a set number that constitutes a universal good credit score. And each of New Zealand's three credit reporting bureaus (Ilion, Equifax, Centrix) has its own scale. However, most credit scores are between 500 and 900, and a good score is considered to be above 750.
It's also important to note that, when it comes to credit scores, average is actually pretty decent. An average score will usually mean you haven't had any serious blips in your financial past. And while your score could be better, you shouldn’t face any serious difficulties obtaining credit.
How can I check my credit score?
Three credit rating companies in New Zealand let you access a free credit history report. And it's a pretty quick and easy process to apply online:
Does everyone have a credit score?
Just about. If you've ever had a loan, or rented, or had your name on a power or telco account, then chances are you'll have a credit score.
How can I improve my credit score?
The main thing that impacts your credit score is not paying your bills. This could be rent, power bills, or personal loan repayments.
Even missed Afterpay payments can hurt your credit score. But additionally, other things such as frequently applying for personal loans can impact the way a bank or lender will view you. After all, if you're in constant need of loans, it doesn't exactly suggest you're financially responsible.
The best way to improve your score is to pay your bills on time and avoid unnecessary loans. This may be easier said than done, and could be a process of revisiting your budget and savings goals to make your outgoing expenses more manageable.
Some suggestions are:
- Pay your bills on time
- Think carefully before applying for any new credit
- Pay down any existing loans and debts
- Consider seeking the assistance of a financial counsellor
- Check your credit report for any inaccuracies
- Hold onto credit cards you can manage
- Lower the limit on your credit cards
I pay all my bills, but my credit score is still low?
A low credit score isn't always the result of poor financial history. It can simply be the result of a lack of financial history. For example, if you're young, have never taken out a loan, or used a credit card, or signed up for a utility. In which case, it may pay to start building your credit score through sensible methods.
For example, if you have the money required for a large purchase, it could be worthwhile making the purchase with a low-fee credit card instead. As long as you pay off your credit card bill in full each month, and avoid paying interest, you can build credit without impacting your finances.
Keep in mind that this takes restraint and financial planning. Many people get credit cards with the intention of paying off the balance in full each month, only to then build debt and miss repayments. While a credit card can improve your credit score if used wisely, it can easily ruin it, too, should you spend more than you can afford.
How long does it take for my score to improve?
It's not a quick fix. And there's no simple answer. If you have years of missed payments and credit card debt, then a few months of sensible spending won't be of much help. So, the longer, the better.
However, do know that data is only held on your credit file for a fixed period, something that is decided by privacy laws in NZ. So, a default 10 years ago (for example) likely won't affect your credit rating today.
But know that significant negative events, like defaults on payments, can impact your score for up to five years. A past credit problem can become less relevant to your credit score as time passes, particularly as recent payment patterns become more relevant. The impact of past defaults will diminish when countered with a subsequent uplift in behaviour.
So, if you can show that over the past year or two you've consistently met all your repayments and outgoing costs, then your missed bills of the past will be less relevant.
I have a bad credit score, can I still get a loan?
Yes, you can. But, you may be limited. Lenders will be less flexible with your repayment options and will offer higher interest rates to factor in the added risk.
Depending on how bad your credit score is, and the reason for the bad score, you may not be eligible for certain lenders. Rather, you may have to turn to lenders that specialise in offering loans to those with lower scores.
If possible, it pays to try to build your score up before going for a large loan, such as a mortgage. This way you'll be able to secure better lending options.
