Guide to Understanding Your Credit Score

How important is a credit score to me?

First and foremost your credit score matters. We are not just referring to one’s ability to get a loan here either. Whether you are facing the prospect of applying for a mortgage for your first home, a personal loan, credit card or even a new job, your credit score tells the story of you. A credit score provides a financial account of your history, dependability and control. Effectively, whether you are worthy in the eyes of financial institutions, prospective landlords, and some employers when deciding to offer you credit, a tenancy, or even a job. Think of it like a curriculum vitae – except instead of job history and personal achievements being listed, your financial history is accounted for instead.

What is a Credit Score?

A credit score represents a person’s credit-worthiness. It is a figure unique to you. A score/rating commonly between 0 and 1000 that assesses your ability to repay bills and credit promptly.  The higher the score, the lower the risk you are to lenders and vice-versa.
  • 300 is considered a low-end score (with heightened risk to the lender).
  • 500-600, an average score
  • 600+ is above average
  • 800+ is considered an exceptional score.
Borrowers in the 800+ range represent around 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.

What is a Credit Report?

A credit report details your personal information against all credit transactions as well as recording any credit enquiries. This differs from a credit score, which is simply a number that indicates how credit-worthy you are. 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.

How to improve my credit score?

The good news is, you can take steps to improve your credit score. Your score is made up of many aspects. Contributing factors include payment defaults, tenancy records, how often you have applied for credit and even your partner’s details if your name is co-signed or included in any joint agreement(s).
  • Pay your accounts and bills on time; a simple step, but one which is crucial. Lenders (or anyone who is showing an interest in your credit score) like to see someone who has a good track record, paying for a credit product on time and in full.  
  • Don’t shop around; as stated previously, too many applications for credit, particularly in a short period of time looks bad in the eyes of the lender.
  • Avoid defaulting on payments; a default looks bad. A default is a failure to meet the legal terms and obligations of your loan agreement. A default will remain on your credit report file for 5 years. If you have defaulted on payment, pay this default. This will lessen the impact of the default.
  • Time; through regular positive behaviour alongside the steps here, you will be rewarded with an increase in credit score. For example, an 18-year-old with no previous credit history will likely have a heightened degree of risk, shown with a lower credit score than a 38-year-old, who has a long standing credit history and models positive credit behaviour over a sustained period of time.    
Further to the steps outlined; we now have Comprehensive Credit Reporting (CCR) in New Zealand. Also known as positive credit reporting, this means positive credit actions and behaviour such as paying your bills on time and in-full is recorded, and such positive action will result in your score duly improving.

How do I find out my credit score?

Of course, you want to know what your credit rating is. Legally you have the right to request information about your credit report – for free. You can contact any of the following credit bureaus, and they can supply you with your credit score and credit record. This would be a highly recommended strategy as opposed to applying for credit at multiple lenders. Or you can even sign-up at credit simple, a free, New Zealand service designed to help kiwis learn about credit scoring, with offers available to you, based upon your score. It is important to know what is on your credit file as it can affect your future borrowing ability. 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 bureau to correct your report, but you will need to supply supporting evidence.