If you’re thinking about applying for a new loan, or maybe just changing your power company, one of the most important numbers you’ll need to know is your credit score. Here’s why it’s such a critical thing to consider, and how it can mean the difference between a ‘yes’ or a ‘no.’
What is your credit score?
A credit score is a number that represents how likely or unlikely you are to default on debt. The range of possible scores is zero (bad) and 1,000 (outstanding), and most Kiwis have a score of between 300 and 850.
Your credit score is determined by a range of factors, including how many enquiries you have, whether you pay your loans and bills on time and whether you have any defaults or collections.
As un-intuitive as it may seem, a perfect credit score doesn’t come with having never had any debt; to obtain a good credit score, you need to have had a good repayment history for your debts, and on-time payments for things such as your phone and power accounts.
How is it used?
Your past payment history is an indication to the lender of how likely it is that you will meet your financial commitments. Of course, it’s not the only factor in determining whether a loan application will be approved, but it is a big influence.
While you may demonstrate you have the ability to repay the proposed loan, demonstrating you have the intent (via your credit score) is almost equally important. If you have a low score, it doesn’t necessarily mean you won’t get a loan approved, but it is likely to be harder to do so, and it could affect the interest rate you may be offered.
What can you do if you have a low score?
Your credit score is not static – it can change on a monthly basis, depending on your debt repayment and utility bill payments to date. Even if you have a ‘low’ score, by making your payments on time consistently, you can start to see improvements in your score in a relatively short period of time.
Keep in mind that even if you are making all your payments on time, credit collections and defaults can also affect your overall credit history. So make sure they are all paid, to help improve your credit score.
Multiple loan applications
Each time an enquiry is made on your credit record, this impacts on your overall score – the more enquiries (and particularly to lenders), the greater negative impact on your credit score. Multiple enquiries can make it look like you either have obtained a lot of credit or that you have been declined multiple times – and neither is a good outcome from a lender’s perspective.
Rather than ‘shopping around’, talk to a specialist who has access to multiple lenders. They can help determine the best lender for your needs and profile, and therefore reduce the number of enquiries on your credit profile, to help your credit score stay in the ‘good’ zone.
Even if you don’t need a loan or a change of utility providers right now, check out what your credit score is anyway. It doesn’t affect your profile, and it means that you can work on improving it if it’s low, before you need to apply for a loan.