Credit Score; your form guide. Would you back yourself?
Your credit score matters. And we’re not directly referring to one’s ability to get a loan here. Whether you are facing the prospect of applying for a mortgage for your first home, indeed a personal loan, credit card or even a new job, your credit score tells the story of you. A credit score provides an account of your history, dependability and control. Effectively, whether you are worthy in the eyes of financial institutions, prospective landlords, and employers alike when deciding to offer you credit, a tenancy, or even a job.
You may be sitting back, thinking this won’t apply to me, I don’t have a credit history, therefore I’m in the clear, so to speak. A credit check provides an insight into payment defaults – including unpaid and late bill payments. The point being, a good score versus a bad score can make all the difference. Think about the prospect of applying for a loan to buy your first new home. Person A for example with an above-average credit history would be eligible for a lower interest rate than person B – who has a poor credit score. This will mean a higher interest rate for Person B that will result in months, even years added on to paying off the loan. So yes, your credit score does matter.
What is a credit score and how do I stack up against the average Joe?
Essentially, a credit check represents a person’s credit-worthiness. It is a figure unique to you. A score/rating between 0 and 1000 that assesses your ability to repay bills and credit promptly. The higher the score, the lower risk you are to lenders and vice-versa. A normal score is around 500-600, anything higher is above average, with a score of 800 plus being exceptional. Borrowers in this field represent only 10% of New Zealanders, who demonstrate a reputation for paying their bills on time and in full on a regular basis. They are likely to have a long-standing credit history. A score of around 300 is considered to be low and may rule you ineligible for a loan by the majority of lenders. This is due to a heightened degree of risk.
A credit report details your personal information against all credit transactions as well as recording any credit enquiries. A credit enquiry is placed when a third party checks your file. Too many enquiries looks bad to lenders and may also result in your credit score being lowered. So think twice before ‘shopping around’ and applying for a loan/credit at multiple finance companies to seek the best deal. You may be doing yourself more harm than good. Your score may drop if you make a number of credit applications in a short space of time, and with it the risk to lend to you may increase. The consequence may be a higher interest rate, even if you meet the loan-serviceability criteria.
A different way to think of a credit check…
Let’s look at a credit check and its relation to lending from a finance company’s perspective. The finance company is taking on risk here by lending to someone. Someone they may not even know, with a dependency on the borrower to repay on time and in full. A credit check is the only identifying factor in the equation. There is risk involved, and it’s a bit of a gamble on the company’s behalf. Speaking of gambling, with the recent surge in interest and wagering on Melbourne Cup, NZ Cup Week etc, we can put the dilemma a finance company faces in horse-racing terms. Stay with me here…
- #1 Empty Wallet As the name suggests, there is not much hope here for this horse. Failed to finish last outing (in racing terms & regarding default payments), and with terrible form aka a poor credit score of 240 one to steer clear of. A serious risk, difficult to back (lend to) Odds: $75.00 rank outsider
- #2 Barbara the Borrower Has a great track record (bill history) however has shopped around a bit with many jockeys on board resulting in a bad run of form and reduced credit score to 320. Hard to back on this factor alone Odds: $32.00
- #3 Average Joe Has seen better days and with a credit score of 380 is not very convincing but possibly one to back (lend to), depending on how lucky you feel Odds: $27.00
- #4 Dependable Delight Solid, with a credit score of 630. A reputable bill payment history that is ever-improving. Definitely worth considering amongst this field. Odds: $10.50
- #5 Stellar Sammy With terrific form (credit score 870) it’s as sure fire a bet as they get. Excellent re-payment history, a long-standing favourite amongst backers, she’s sure to impress again Odds: $3.50 raging-hot favourite
Not to get too side-tracked, the scenario above outlays what it is like for finance companies when deciding who to back (lend to). Each potential borrower is unique with their own ‘form guide’ so to speak. Certain criteria must be met and fulfilled to ensure the borrower is seen to be worthwhile and will meet repayments deadlines.
How do I find out my rating?
Of course, you want to know what your credit rating is. Legally you have right to request information about your credit check. You can contact any of the following credit reporters, and they can supply you with your free credit check record. This would be a highly recommended strategy as opposed to applying for credit at varying lenders.
It is important to know what is on your credit check as it can affect your future borrowing. It is also important to request your free credit check from all three reporters because if one of the reports is incorrect, this may cause you to be declined for credit. You can request the reporting company to correct your report but you will need to supply evidence.
It’s not all lost…
First off, your credit score is not set in stone. Your score varies over time as your habits change. With good habits you can increase your credit score to a respectable, trustworthy standard. This doesn’t mean you should be scared clear of using credit. Continue to use credit but be conscious not to max your card to its credit limit on a regular basis.
A low score may also be apparent if you forget to pay your bills – perhaps set up direct debit payments if possible. If you haven’t used credit before this may also lead to you having a lower score than the average joe.
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