Credit scores — what are they? Even if you've never heard of one, credit scores matter. A good score can make a significant difference in your financial life because it's a number that helps secure bank loans and low-interest rates.
Before you go trusting Google, you should consider what a good credit score is in New Zealand. The numbers don't all mean the same thing everywhere you go, which is why we've tailored all our info specifically for Kiwis.
Ready to begin? This blog will explain what influences your credit score and how you can take yours from average to extraordinary.
So what's a credit score?
Your credit score acts as a summary of your credit history. It's a way for banks to see how financially responsible you are at a glance.
Your credit score takes into account your past behaviour with loans and repayments. Do you have a bunch of missed repayments? Heaps of maxed-out credit cards? Or are you good at paying your bills ahead of time?
Yeah, but why does my credit score matter?
It's real simple. The better your credit score, the lower interest rates you'll get offered, and the higher the chance your application for a loan will be accepted.
All of which can help you get that new house, car, or another item. Plus, lower interest rates mean you'll pay less interest (the extra money a lender charges you on top of your 'principal' or the original amount you borrowed).
Let's break down what that looks like. Say your friend Callum wants to get a new car. He takes out a loan for $40,000 at the bank to pay back over five years. Callum's always been good with his money and has a good credit score — which earns him a low-interest rate of 6%, compounded annually.
Callum's twin brother, Jack, wants the same car — but he's not so good in with credit. He takes out the same loan as Callum for the same term. But because he's got a lower credit score, the bank doesn't trust him to pay it back — so they hedge their bets by hitting him with a higher interest rate of 12%.
Over those five years, assuming both guys pay back their loans on time and the whole, Callum will have paid an extra $6,221.56 on top of that initial 40k. And Jack? He'll have paid an additional $12,645.67 — over twice as much as what his brother paid!
That's why your credit score matters.
So how does anyone work out what my credit score is?
Your credit score is based on both positive and negative financial actions. What that means is if you're paying your loans on time and in full, your score goes up. Missing bill payments or defaulting on your loans means your score goes down.
Of course, nothing's that simple. Heaps of other factors come into play, including:
- How old you are.
- How many loans you've taken out.
- The number of credit enquiries you make.
- Additional payments, like your utility bills, rent, etc.
- Any court judgments against you.
- And more.
So how do I fix my credit score?
There are many ways you can get a poor credit score sorted out.
First things first, it's time to look at your credit report. Keep an eye out for any possible errors, and get them corrected if you see any. Simple mistakes could trip you up when applying for loans, so you want to make sure everything in your file is correct.
Does your payment history look good, but your credit score is still low? You may need to think about changing your spending habits and making wiser financial choices to build a better credit history. Because both positive and negative lending behaviour impacts your credit rating, taking the proper steps — like making sure you pay back your debts regularly and on time — can help you creep up from a weaker score to a nice high one.
Remember - your credit score didn't get bad overnight. It'll take time before it builds up to a better level. But it is just taking the time to get a plan together and put yourself on the path to better financial health.
The best way to start your journey to better credit is by knowing where you stand.
The best way to start is by taking the time to set yourself up with a reasonable budget. A proper budget can make a big difference when it comes to getting your debts under control. Start by calculating how much you spend each month and plan a payment schedule for any current obligations. Also, make sure you set reminders so you don't miss any repayments.