Your credit score can significantly impact your ability to study, start a job, or buy a home. That's because credit scores are how lenders check if they can pay their money back on time and in full.
In this blog, we'll teach you how to check your credit score and why it even matters in your day-to-day life.
So what is a credit score?
A credit score is basically what credit providers use to work out if you're a safe, reliable borrower and it's the borrower's way of checking whether you're likely to pay their money back on time and in full.
After all, if you had a friend with a reputation for not paying people back, would you trust them?
What makes up a credit score?
Credit scores are numbers that sit between 0 to 1,000 — the bigger, the better. Most people have credit scores somewhere in the 350 and 800 range, with 580 and 670 reasonably average. Any score above 700 is good — any score above 800 is excellent.
How do people work it out?
Credit reporters (we've got three here in Aotearoa) work out your score using your credit history.
Each of these credit reporters uses different information, like the number of credit cards you have or loans you've taken out, to piece your score together. It's related to your history of borrowing (and hopefully paying back) the money you owe.
Just remember, any credit can count towards your credit score — that includes credit cards, store cards, mortgages, personal loans, and even your phone, water, power and internet bills.
Why are credit scores important?
A poor credit score acts like an ample warning light that tells lenders you don't know how to handle your money. Which means they're less likely to take the risk of lending to you.
However, if they do decide to offer you a loan, they'll likely charge you more interest, based on the risk they've taken. Alternatively, the less risky you look, the lower interest rates you'll be charged — because more lenders want to deal with you and are more confident you'll make repayments.
Are there any other downsides to a low credit score?
A poor credit score can hurt you in more ways than just making it hard to take out a loan for that next holiday.
Are you planning to head to (or back to) uni or trade school? A bad credit score might mean you have a hard time taking out a private student loan or saddle you with high-interest rates.
Many employers also conduct background checks when they're hiring. You might see a credit check in action if you're applying for a job that involves handling money — not just for bankers and accountants.
My credit score is relatively low.
Because your credit score is based on your borrowing and repayment behaviour, you can change it by changing the way you handle your debt. Since improving your credit score is all about being financially responsible, improving that number will also help with your savings and financial behaviour.
Missing repayments, however, impacts credit scores negatively. Luckily a regular repayment history can help fix that — and it's never too late to start. Even though black marks stay on your record for about five years or so, little by little, they slip away, and better financial patterns take centre stage. So be patient and make sure you pay back your bills on time and in full.
Don't forget — all bills affect your credit score. So make sure you're not putting off paying your phone bills to pay that car loan. If you're having trouble paying back your debts, have a chat with your lender to iron out a repayment plan, or meet with a budget advisor for info on getting yourself sorted.
Your credit score is a little bit like your financial CV. It gives a history of where you've been and what you've done, and everyone can check it before they start lending to you.
This is why it's essential to show you can handle money well and pay off your debts on time and in full. If you don't, it could just give off the wrong impression.