If you’ve ever taken out a loan, a credit card or made a hire purchase, you’ll have a credit score. But what exactly does this score measure? In short, it’s a number that tells banks and lenders how much money you can secure when applying for loans or other credit amounts.
New Zealand has its own credit ranking system, similar to those used overseas, which is used to determine the credit score of individual Kiwis. This scoring system is based on your credit history, including information such as loans applied for, the number of credit cards you hold, any outstanding debt, etc. All this information is used to build a picture for credit lenders and banks, telling them who can be trusted with cash loans and what interest rates they should pay.
To determine your credit ‘worthiness’ your score is ranked between 1 and 1000. It's good to keep in mind that your credit score can change over time, depending on any repayments or money you owe on existing loans/hire purchases.
Give yourself some credit.
Having a good credit score is the smartest way to get ahead financially. A great score can unlock access to loans, and larger limits on credit cards or accounts. It also ensures lower interest rates on your mortgage, so you can avoid paying additional fees.
At Yonda, we provide you with much more than your credit score. We allow you to view your complete credit data, give you ongoing advice and goal-setting techniques to grow your credit and even help you protect your credit against potential fraud.
So who checks your credit score?
Anyone who deals with you financially, including credit lenders, businesses and potential employers. Generally, someone will only look at your credit score when you're actively applying for credit or undergoing a major financial decision, including;
· Loans
· Credit cards
· Mortgages
· Bank accounts
· Phone contracts
· Car finance
· Insurance
· Rental accommodation
In most cases, whoever accesses your credit score will have to ask your permission first (although this doesn't include public sector agencies or debt collectors).
What is a good credit score to have?
To be considered a safe and secure borrower, your credit score will generally need to be above 600-700. Anything below this labels you as a higher risk to loan and credit companies.
- 0-299 - High risk. Unless you've previously been declared bankrupt or running into debt, you shouldn't be running this low. If you do, you may face problems securing future credit. Sorting out regular repayments for defaults on loans is a great way to improve. Also, try paying off/getting rid of any credit cards. These contribute to a lower score and can affect applications for future credit.
- 300-579 - Below average. If you're in this range, it could indicate that you've yet to build much of a credit profile. Or, if you already have an existing credit file, you might need to improve the structure of your credit/repayment schedules so that you have a better history of repayments.
- 580-670 - Fairly good. You should be able to secure loans from banks around the 600 bracket, but that also depends on you having additional savings as well. Keep up the excellent work, though — having savings goals and a healthy score will help banks see your vision more clearly, whether you're looking to pay off a house over the next few years or start another type of loan.
- 671-739 – Pretty healthy. You probably haven't gone bankrupt or had any major credit defaults. Keep improving your score with regular repayments or by clearing any existing debt.
- 740-799 – Very good. You'll still have no problem getting a loan in this range. Those who score in this bracket can keep climbing by minimising their credit applications or resolving existing loans/credit cards.
- 800 or above – Nearly perfect. A score of around 800 is something about which you can boast. This means that you've repaid every loan you have applied for on time so that you can enjoy excellent interest rates for all your hard work.
- 1000 – A perfect score. Reaching 1000 means you'll likely have spent a lifetime making timely repayments and securing safe loans for homes and mortgages. But don't worry about getting here for now — the sooner you start making positive contributions to your credit history (such as repaying off an owing amount), the better your score gets. Few lenders expect absolute perfection anyway, so you likely won't need a score this high to secure most loans.
Improving your credit score
The good thing about a credit score is that it can be continuously improved over time, so you won't always be seen as a risk to banks and lenders. Here are a few tips on starting:
- Make payments on time. This includes payments for outstanding loans and bills.
- Pay your credit card in full. Cancelling existing debt is an excellent way to secure more credit.
- Don't share bills. Often it's not you that lowers your credit score, but the people with which you share accounts and bills. Keeping your bills separate from others is an excellent way to improve your score.
- Limit your credit enquiries. Each time you apply for credit, your credit score will dip slightly and will only improve once you can show a consistent history of repayments. Try and keep credit enquiries to a minimum, to rebuild your score in between fresh applications.
- Cancel unused credit cards. Having an excessive number of credit cards adds complexity to your credit history. So, if you aren't using a card, get rid of it. This will help sort out your credit history and any existing debt.
In short.
We all occasionally need a loan or a new credit card. A credit score isn't designed to keep you from any of these things but to help lenders learn more about your financial capabilities. So, to give them the best picture of you, it's a good idea to do everything in moderation. That way, when you're asked for your score by lenders and bankers, you'll have no reason not to give it out freely.
