You may have heard people talking about ‘credit scoring’ before, but how relevant is it to your everyday life? Well, in short, it's very relevant. In fact, it's perhaps the most relevant thing in your financial life.
Credit scoring directly affects your financial well-being. Maybe your friend tried applying for a new credit card, or you heard them complain about a house they’ll never be able to afford. Both examples are impacted by credit scoring.
Your credit score is part of a larger financial picture that makes up you. Along with your income, job title, living situation, bill payments, savings, number of dependants and other details, your credit score forms a statement that lenders and credit providers look at before they approve you for loans, credit cards and other financial amounts.
So, while your credit score isn't the entire picture, it's a very important part because it records your lending behaviour. If you repay loans badly, it reduces your score. If you do it well, it increases it. And those with a high score are looked on favourably (along with additional details) for other loans.
Note that we say favourably — there's no guarantee of securing a loan with a high credit score alone.
But first, what do credit scores actually look like?
A number between 1-1000.
Your credit score is a number between 0 and 1,000, with 0 being the worst score possible and 1000 being the best. Technically, you can sink lower than 0 and raise higher than 1000 if you're in extreme debt or exceptionally good with credit. But these circumstances are rare enough not to go into detail about them.
Bankruptcy, insolvency and frozen (or paused) credit accounts won't show you your score because it's technically paused. You can find out more in our blog on the topic here.
What makes up a credit score?
We covered this subject briefly in the intro, but there are lots more details that make up a credit score, including;
- How much you've borrowed in the past
- Whether you've repaid your debts on time
- How often you've applied for credit
- If you've ever failed to repay your debts
- And even how old you are
What does my age have to do with my credit score?
Your score is based on your history of borrowing and paying the money back, so the younger you are, the more likely you are to have a lower score. All it means is you need more time to build up a credit history.
But what if you do have a record of borrowing badly, which led to a low credit score in the first place? In that case, you should increase your score before applying to borrow in the future. Otherwise, you risk lowering your score by asking to borrow money you're unlikely to receive.
Is it possible I don't have a credit score?
You might not have a credit score if you've never applied for credit. Those under 18, for instance, might only have one if they're taking out credit to buy a car or maybe a new PS5.
But keep in mind that even your water, power and phone bills affect your score. That's why most people over 18, who pay for more oversized items like flats and insurance, have a score of some sort.
Make sure to get your credit score checked.
Getting an official credit score report is usually done through a credit reporter — an agency qualified to interpret your credit information and produce a statement, which lenders, banks and other credit providers can access. You can also request this report yourself.
Here in New Zealand, we've got three credit reporting agencies that can give you a detailed credit history report for free. These credit reporters are Centrix, illion and Equifax.
So what do the numbers mean?
As mentioned above, credit scores are between 0-1000, with each credit score 'band' of numbers communicating information to lenders about you as a credit borrower and money user. How much your score matters depends on who you approach for a loan or credit amount. Some lenders expect to see a high score before offering you anything, while some will be more prepared to deal with you but may offer high-interest rates.
Let's look at each score band in more detail.
If your credit score's a zero, you probably have something negative on your file. Perhaps you've had court fines imposed, a court summons, or maybe you've even filed for bankruptcy.
Remember, it's not always a single thing on your credit report that will bring it down. Many missed payments or defaults accumulated over time severely affect your credit score. Another example is with credit enquiries. Continuing to apply for credit will drop your score a little each time, possibly bringing your score down to near zero.
But even if your score is this low, there are ways to get it up again.
For starters, you can pay back any debts you owe or at least devise a plan with your creditors or collection agency about settling your overdue amounts.
It's also good to start thinking about better financial planning — you could even try calling a budgeting helpline for legal advice. We're not legal professionals, so we can't do any more than give you pointers. But our tips are based on experience working within the credit and lending industry — so we feel we know something about the subject.
By taking early steps, you'll build up a better credit history, and your score will start reflecting the work you're putting in.
A score in this range probably means that you've had some negatives on your credit score, like defaults, but some positive info, too — such as bills you managed to pay in time.
If you don't have any current defaults, you might still have a history of late payments or have recently enquired for credit. As mentioned above, over-applying for any loan or credit amount will affect your score.
There are still lenders who will deal with you in this range, but the importance of credit scoring is increasing in New Zealand, with more lenders looking closely at this number when issuing any loan application. You're also unlikely to get the best credit deals and may pay very high levels of return interest — so be cautious.
If your score's sitting between 300 and 579, you're considered a little below average. You probably won't have anything negative on your credit report, like payment defaults, court judgements or a summons on your file.
Your score may be in this range if you're just starting your lending journey. Or if you've applied for credit from many different places or services looking for high-risk customers. Whatever the case, don't worry — it takes years to build up an excellent score. Just keep up working at it.
A score between 580 and 670 puts you comfortably in the same range as most people. Maybe you're a little older or have been repaying money to a loan or credit card.
A score like this suggests that there's not really anything significantly negative on your report recently — but probably not anything that positive, either.
You're above average and can gain access to competitive interest rates, credit cards, and loans at this range. You've likely been adding to your credit report for a while with reasonable repayments.
Our tip is to keep going, but you can take advantage of opportunities as you see them. Over time you might build towards a score in the high 700 or 800s, which will help you secure loans for bigger things like property or business investments. But at this range, you could be approved for lower-end investments, depending on the lender.
Any score above 740 is at the higher end of credit scores.
If your score is above 740, you're probably older and have spent years building an excellent credit score. You'll also be a disciplined spender, only applying for credit when needed.
Why do credit scores matter?
You'd be surprised how many people might be checking your credit report.
Throughout this blog, we've talked mainly about credit lenders and banks, but credit unions, businesses, and potential employers check your score to see how reliable you are with money. Even landlords sometimes consider credit scores when looking at new tenants.
A credit score determines whether you're a liability with money Lenders, in particular, want to get the money they lend back, so they use your score to see if you're likely to repay your debts. That's why you might be asked for a credit check when you apply for loans, credit cards, mortgages, bank accounts, phone contracts, car finance, insurance and rentals.
Credit scores comprise many different pieces of information, from how much you've borrowed to how you repay your debts. They're scored from 0-1000, with anything below 580 being not so good and over 670 being unique. All of which your lender will consider, alongside your savings information and house/business/other credit goals, before approving or rejecting your loan application.
Although, as we keep reiterating, there's no 100% guarantee. However, a good credit score increases your chances of getting accepted for a loan, while a poor one almost certainly will cut you off from most loan applications.