What's a good credit score and why does it matter?
Heard someone mention a credit score and wondering what it means and how it affects your ability to obtain credit? Read on for a complete guide to what you need to know about credit scores.
SUMMARY OF CREDIT SCORES AND CREDIT REPORTS
- A credit score is a score between 0 and 1,000 and is used in part by lenders to decide what loans to offer you and at what interest rates.
- You can check your credit score through CreditSimple, My Credit File or Centrix.
- Any score above 500 can be considered 'good'.
- You can improve your credit score by correcting issues on your file and through regular repayment behaviour.
1. What is a credit score?
2. How do I check my credit score?
3. What is a good credit score?
4. What affects your credit score?
5. Why does a credit score matter?
6. What to do if you have a bad credit score
7. How to improve your credit score
8. What if you don't have a credit score?
WHAT IS A CREDIT SCORE?
A credit score is a single number between 0 and 1,000 that many lenders use to decide if they lend to you, how much they lend to you, and what interest rate they offer you. Basically, it’s your ‘grade’ as a borrower. The better your previous borrowing behaviour, the better your score.
You aren’t born with a credit score. It’s slowly built over a long period of time. Every time you take out a loan, make repayments, miss a payment, switch providers, and so on, your credit score may change.
A credit score is just one part of your overall credit profile, and it isn’t the only thing that matters. Here are some other terms you might come across:
- Credit history or credit file. This is a log of all of your borrowing history, including but not limited to transactions, loans taken and paid, mortgage information, utility and phone contracts.
- Credit report. This is a summary of your credit history (including enquiries), and it usually includes (but isn’t limited to) a credit score. This is usually what a lender looks at first when they evaluate your loan application.
- Creditworthiness. This is an evaluation performed by a lender to figure out whether they want to lend to you. Your credit score is part of that check.
- Credit reference agencies. These are the agencies that collect credit data about you and supply it to lenders once you make an application. There are three main ones in New Zealand: Equifax (formerly Baycorp or Veda), Centrix and illion. Remember that each of these agencies has a different way of creating your credit score, so there is no comprehensive national credit score.
- Credit score providers. These are the public side of credit reference agencies that provide credit scores to consumers. This includes illion’s Credit Simple, Equifax’s My Credit File and Centrix’s direct service.
HOW DO I CHECK MY CREDIT SCORE?
There are three main ways to access your credit score:
1. Credit Simple, provided by ilion. This is a free online portal and dashboard that provides your score after signing up.
2. My Credit File, provided by Equifax. Getting your credit report is free with a wait time of up to 10 days.
3. Centrix provides credit reports directly with a 5-10 day wait time.
These tools are free. You don’t need to pay to get your score.
WHAT IS A GOOD CREDIT SCORE?
Credit Simple states that a good credit score is anything above 500. A good score often lets you get better offers from banks, telecoms, insurance companies and utilities.
If you’d like to learn more about the specifics of each credit score band including the one you are in, visit Credit Simple for more information.
WHAT AFFECTS YOUR CREDIT SCORE?
You might be wondering why your score might be better or worse than somebody else’s. There are lots of things that affect your credit score, including:
- Your borrowing and repayment history.
- How much credit you take out.
- How often you take out credit.
- How often you change address.
- How often your credit is checked.
- What lenders you get credit from.
Different behaviours will impact your score differently too. A missed phone repayment bill from 5 years ago isn’t going to affect your score as much as a default from last week.
As a rule of thumb, if something happens that may affect your ability to make repayments, it may also impact your credit score.
Remember: it’s not just negative. Positive behaviour like prompt repayments may improve your credit score too.
WHY DOES A CREDIT SCORE MATTER?
A credit score usually impacts three major parts of your borrowing ability:
- If you can borrow.
- How much you can borrow.
- What interest rate you are charged.
Someone with bad credit can often still get a loan, but they might need to pay more interest or provide a higher deposit/more security.
Someone with a good credit score can sometimes get better deals on their interest rate. They’ll also have an easier time getting a loan in the first place.
Property managers, insurers and employers also sometimes check your credit score before they rent to, insure or employ you.
Do I need a particular credit score to get a mortgage or car loan?
You don’t need a particular credit score to buy a house, car, or get anything else. Credit scores are not the only thing a lender considers. They also consider your income, your debts, your expenses and assets. This is to ensure that any loan you are provided is affordable.
A good credit score doesn’t guarantee you instant approval. A bad credit score may not stop you from getting a loan altogether.
WHAT TO DO IF YOU HAVE A BAD CREDIT SCORE
If you’ve checked your credit score and it’s not as good as you like, don’t panic. Every lender evaluates you differently, and what counts as a “bad score” for one lender might not for another. There’s no national ‘blacklist’ of borrowers. Shop around if you have trouble with one lender. A finance broker may be able to help you out.
Remember, a few years of solid repayments will improve your credit score enough that you may be able to refinance for a better deal.
HOW TO IMPROVE YOUR CREDIT SCORE
A credit score can be improved both right now and over the long term.
Check your credit history for errors and continue to check it every year. If there are issues, get in touch with the credit reporting company the issue is filed with and get it fixed. This will then flow on to your credit score. Keep an eye out for:
- Credit accounts you’ve never applied for
- Payment defaults you didn’t know about
- Credit enquiries you didn’t approve
If you spot any particularly worrying ones (like a credit card you didn’t apply for), you may have been a victim of financial fraud. Here’s a link to what you need to know and do if that’s the case.
If you’ve defaulted on a loan in the past and can now pay, do so. Once paid, the negative impact reduces (but doesn’t go away entirely).
If you’re in debt and can’t pay it back, get in touch with your lender. It’s better to sort out a plan and avoid a missed repayment than let it sit and damage your credit score.
Long-term is harder but more important. You should aim to:
- Pay back your current debts and build up a history of good repayment.
- Try to avoid taking on more debt as much as possible. Establish a budget, use a prepay mobile, save for items rather than use a credit card.
- Data is only held on your file for a certain amount of time (four years at the time of writing), so a default from a decade ago isn’t going to affect your score now.
Improving a credit score this way can take up to two years or more.
WHAT IF YOU DON'T HAVE A CREDIT SCORE?
If you’ve never had a loan or signed up for any utility or phone contract, you might not have enough borrowing history to build a credit score. This often happens when you’re younger and haven’t needed to get a credit card, mortgage or car loan yet.
You can still apply for credit if you don’t have a credit score. Your lender may just ask you for additional information.
If you’d like to find out your credit score visit creditsimple.co.nz, mycreditfile.co.nz or centrix.co.nz.