Have you ever wondered what your credit score is? Perhaps you already know your score and want to know how to improve it. Or maybe you want to buy a new car and are thinking, “What’s a good score for car loan?”
If yes, this article is just for you.
We’ll lay down the answers to these questions, and some more.
- What is a credit score?
- How is credit score calculated?
- How to check your credit score?
- What is a good credit score?
- How to improve credit score?
- What to do when you don’t have a credit score?
What is a Credit Score?
A credit score in New Zealand is a single number typically between 0 and 1,000 that demonstrates your creditworthiness to lenders — that is, how likely you are to pay off a loan. The higher your score, the better your creditworthiness.
Lenders use the credit score to decide:
- Whether to lend you money or not.
- How much money to lend you.
- How much interest rate to charge you.
Typically, lenders offer more credit, and at better rates, to consumers with an impressive credit score. That said, a high credit score by itself doesn’t guarantee loan approval.
Effectively a credit score is as a barometer of a borrower’s credit health, it has its limits. That’s because it reflects only the “meat and potatoes” of an individual’s financial habits — things such as debt repayment history, debt accumulation status, and active accounts.
Furthermore, a credit score is just a number. It doesn’t shed any light on why your score is the way it is.
For these reasons, lenders also frequently check a borrower’s credit report to get a true picture of their creditworthiness. A credit report tells lenders all about your credit history, including the following information:
- The amount of credit you’ve received or applied
- Your track record in paying back debts
- The type of loans you’ve taken, such as personal loans, mortgages, car loans etc.
- The length of time different credit accounts have stayed active
- Whether you are seeking new credit or loans
How is Your Credit Score Calculated?
Your credit score is based on both the positive and negative financial history found in your credit report. In simple words, this basically means:
- If you consolidate all your loans into one and repay your loans on time, your credit score may get better
- If you have different types of loans, like cash loans, mortgages, etc., and miss payments or default on a loan, your score will get worse
As you can see, the system rewards financial stability and timely payments and penalizes financial instability and late payments.
Of course, things are much more complicated than this. Your final score is calculated after taking into account a number of factors. These include:
- The average age of all your accounts, as well as the oldest and the newest account
- For how long your accounts, including vehicle or car loans, personal loans, overdrafts, and others, have been active
- How many accounts you have in total and how many were opened recently
- Late payment history, including default payments
- Your monthly payment history, including mortgages, credit cards, car mortgages, personal loans, hire purchases and other
- Your payment history of utility bills, like electricity, energy and phone bills
- Any enquiries made by lenders of your credit report in the past 5 years
- Any bankruptcies filed in the last 7 years
Of course, different behaviors impact your credit score differently. Generally speaking, the more severely an action affects your ability to make repayments, the greater its impact on your credit score.
So, defaulting on your mortgage is likely to have a far greater negative impact on your score than being a week late on your electricity payment.
How Can You Check Your Credit Score?
There are three credit reference agencies in New Zealand: Centrix, illion, and Equifax. Each of them calculates the credit score differently. That’s why there’s no such thing as a comprehensive national credit score.
You can check your credit score for free using any of these three options:
- My Credit File (owned by Equifax) – It provides the credit report for free within 10 business days. All you have to do is fill in your personal details. Are you in a rush to access your report? You’ll have to pay for it. The paid service delivers the credit report within 3 business days.
- Centrix – Fill in your details to get a copy of your credit report for free in 5 to 10 working days.
- Credit Simple (owned by illion) – A free, easy-to-use online portal, Credit Simple lets you access your score after you sign up.
What is a Good Credit Score?
In New Zealand, anything above 650 is regarded as a average credit score, according to Centrix. A higher credit score improves your chances of getting a loan. Also, lenders typically offer lower rates to consumers with a better credit history.
A below-par credit score, however, doesn’t mean the end of road of you. You can still get a loan, but you may have to pay more interest.
Also, different lenders may set a different cut-off mark. Furthermore, a good credit score for one type of loan may not be sufficient for another type. For instance, cash loans may have a lower minimum credit score than say a mortgage.
Centrix Credit Score Table
How to Improve Your Credit Score?
If your credit score is lower than you would like, there are many short-term and long-term steps that you can take to improve it.
Check Your Credit History
A mistake on one of your credit reports could be hurting your score. So, get a copy of your credit report without delay and check it for errors before doing anything else.
If you find a mistake, contact the relevant credit reporting company and get it sorted out. The correction will then flow onto your credit score. Things you should particularly watch out for include:
- Credit enquires not approved by you
- Payment defaults you had no idea about
- Credit accounts you never remember applying for
If you see any severe error in the report, such as a credit card that you hadn’t applied for, you may have been scammed. Check out this link to know what you should do in that case.
If you’ve defaulted, pay it up
Did you default on a loan in the past, but are in a position to pay it off now? If yes, do so.
The default will reflect on your report for 5 years, irrespective of whether you pay or don’t pay it. However, if you pay up, its impact will reduce (even though it won’t go away completely). Plus, paying off the loan will make you look more responsible and hold you in good stead the next time you shop for a loan.
Talk to your lender
In case your financial situation doesn’t allow you to pay up an existing debt, speak to your lender. Sit with them to work out a payment plan that you stick to rather than missing one payment after another, which will only hurt your credit score and overall credit profile.
Consider debt consolidation
Debt consolidation combines several debts into one, typically with a much lower interest. Savings on interest and having to pay fewer payments can help you stay on top of your debt.
For instance, in New Zealand, it’s not uncommon to see personal loan rates in the range of 29.95% per annum or credit card rates of around 24.95% per annum. In comparison, many lenders offer plans for consolidating debts starting at less than 9.95% per annum.
Combining multiple smaller, high-interest debts into one big loan with a lower interest rate can make it easier for you to pay off debt. This, in turn, will reflect positively on your credit report.
Pay your bills on time
Build up a history of good repayment and demonstrate responsible financial behavior by paying bills on time.
Avoid taking on more debt
As much as possible, avoid piling on more debt. Creating a monthly budget, saving for items instead of swiping a credit card, and using a prepay mobile are all small yet effective tips to keep your expenditure under control.
What To Do When You Don’t Have A Credit Score?
If you have not borrowed before, you will not have a credit history and, consequently a credit score. Getting credit without a borrowing history is difficult — but not impossible.
You can ask a family member or a close friend with an impressive credit history to co-sign or as a guarantor. However, remember this is no small favor. The co-signer or guarantor will have to make payments if you can’t or don’t.
Another option is to go for a secured loan, which most lenders are happy to offer to those who don’t have a credit score. However, you will have to deposit something as collateral and the credit limit will be based on the value of the collateral.
If you want to talk to us about applying for a loan please call Quick Loans on 0800 200 275 or simply apply online.
This is not legal advice.