You probably would have heard people talking about 'credit scoring' before. Maybe your friend tried applying for a new credit card or complained about a house they'll never be able to afford. Which begs the question — what are credit scores, and why do they matter?
In this blog, we'll teach you how credit scoring works, how you can check your score online and what the numbers mean.
So what's my credit score?
Your credit score is a number between 0 and 1,000 that shows how creditworthy you are and how likely you are to pay your bills back on time. It's a way for lenders to work out how safe you are when lending money.
What makes up a credit score?
There's are lots of 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
- Even how old you are
What does my age have to do with my credit score?
Because your score is based on your history of borrowing and paying the money back, the younger you are, the more likely you'll have a lower score. It often means you just haven't had 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 might want to look at increasing your score before you apply to borrow in the future.
Do I have a credit score?
If you've never applied for credit, you might not have a credit score. Those under 18, for instance, might not have one (unless 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 big stuff like flats and insurance, have a score of some sort.
Get your credit score checked.
Getting an official credit score report is usually done through a credit reporter — that's an agency qualified to interpret your credit information and produce a statement, which can be accessed by lenders, banks and other credit providers. 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 user of money. Depending on who you approach for a loan or credit amount will determine how much your score matters. Some lenders will expect to see a high score before they offer you anything at all, while some will be more prepared to deal with you but may offer high-interest rates for doing so.
Let's look at each score band in more detail.
If your credit score's a zero, that means you've probably got something negative on your file. Perhaps you've had court fines imposed, a court summons, or maybe you've even filed for bankruptcy.
Remember, though, it's not always one thing on your credit report that will bring it down. Lots of missed payments or defaults accumulated over time affect your credit score quite severely. Another example is credit enquiries. Continuing to apply for credit will drop your score a little each time and could bring your score down to near zero in some cases.
But even if your score is this low, there are ways you can take to get it up again.
For starters, you can pay back any debts you owe or at least put together a plan with your creditors or collection agency about how to settle 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 perhaps you've enquired for credit recently. 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 currently increasing in New Zealand, with more lenders looking closely at this number for all their loan applications. You're also unlikely to get the best credit deals and may end up paying 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.
You may see that your score is in this range when you're just starting. Or maybe you've applied for credit from a bunch of different places or services that look out for high-risk customers. Whatever the case, don't worry about seeing your score in this range — it takes years to build up an excellent score.
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 take advantage of opportunities as you see them. Over time you can 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 up an excellent credit score. You'll also be a disciplined spender, only applying for credit when you need it.
Why do credit scores matter?
You'd be surprised just how many people might be checking your credit reports.
Throughout this blog, we've mentioned lenders, but credit unions, businesses, and even 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 is used to determine 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 even a rental.
Credit scores are made up of many different pieces of information, from how much you've borrowed to how you pay your debts back. 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.