Posted September 2016 by NZCU Baywide
What is a credit score, and how will it affect my personal loan application?
Applying for a loan should be a stress-free process.
Unfortunately, this isn’t always the case.
Your credit score could negatively affect your chances of landing a loan, as well as the amount you receive and the interest rate you pay. That’s potentially hundreds if not thousands of dollars in extra interest coming out of your back pocket.
Maybe you were planning on using this cash to expand or renovate your home? Perhaps even purchase a car? A personal loan offers you the financial freedom to realise your dreams, but they can be cut short by a nasty credit score surprise.
The good news is, you’re not alone!
Recent studies show that 92% of New Zealanders don’t know their credit score, some 72% don’t know what a credit score is, and only 13% have ever ordered their full credit file.
So where to from here?
Today we’re bringing you up to speed on everything you need to know about credit scores. So if you’ve ever wondered what your credit score is, or found yourself struggling with a low credit score, you’ll find the answers below! This includes:
- Everything you need to know about credit scores and how they’re calculated.
- Why your credit score could have you paying more - or less - interest on your personal loan.
- How to check your credit score right now for free!
Let’s kick things off with the basics:
What is a credit score?
Your credit score is a culmination of your credit history. It acts as a numerical representation of how financially responsible, reliable, and trustworthy your are in the eyes of financial institutions.
- Do you have a history of missing loan repayments?
- Maybe you hold a number of credit cards, all maxed out?
- Or perhaps you pay your bills on or even ahead of time?
All of these factors and more are recorded in your credit report, which is then accessed by financial institutions via Centrix, Dun & Bradstreet, or Veda Advantage when you apply for a loan or credit.
Why does this matter? Because the lower your credit score, the higher your interest rates, and the greater the chance that your application will be rejected.
Credit unions and banks - as well as other financial providers - take a methodical approach when lending you money. To them, the best predictor of future outcomes is past behaviour.
Here’s an example:
Say you lend your car to a friend for the weekend, only for them to return it a month later. Would you be all that enthusiastic about handing over the keys for a second time? We didn’t think so.
The same goes for lenders.
How are credit scores calculated?
Your credit score is calculated on both the positive and negative financial history found within your credit file. Here’s what that means for you:
- If you pay off your loans on time and consolidate all of your debts into one, your score will improve.
- If you miss bill payments or default on your loans, your score gets worse.
This system rewards prompt payments and low debt, and penalises late payments and financial instability.
Of course, it’s a little more complicated than that.
Your final credit score is a culmination of a number of factors, including:
- Your oldest and youngest accounts, as well as the average age of all of your accounts.
- The age of your current line of credit.
- How active your accounts have been, including home loans, car or vehicle loans, private bank loans, study loans, rent, retail installment finances from private lenders and other similar activity.
- How many accounts you’ve opened recently.
- Overdue or late payments, including any payment defaults.
- Any enquiries made of your credit report over the last five years.
- Your monthly repayment history, including credit cards, mortgages, car finance, hire purchases, home loans, car loans or any other form of loan or credit.
- Payment history for other everyday expenses such as electricity and energy bills, gas, and phone accounts.
- Court judgements against you, in the case of outstanding debts, Non Asset Procedures (NAP), Summary Instalment Orders (SIO) and Bankruptcies.
So how does my credit score affect my personal loan application?
As we’ve covered, a credit score is more than just a number. It’s a measure of your current standing in the eyes of financial institutions, and how likely you are to repay a loan or credit card in the future.
With this information, lenders can determine:
- Whether you can borrow.
- How much you can borrow.
- The interest rate that you’ll pay.
Just like a good review might mean you’re more likely to buy a product or watch a movie, a high credit score instills confidence in a lender. They can be confident that you’re reliable, that you make payments on-time, and that you’ll see your loan through to completion.
The best part? In return, you’ll have access to a larger personal loan at a lower interest rate.
On the other hand, a low credit score will see you paying a higher interest rate and facing limitations on the amount lenders will offer you.
But it isn’t all financial doom and gloom!
Your credit score is an important factor, but it’s just one that lenders consider when looking through your application. They also look at:
- Your current employment status.
- Your income or salary
- The length of your employment
- Monthly income & expenses.
All of these factors play their part in whether your application is approved, as well as the rate you’re offered.
Here’s how you can check your credit score right now for free!
‘I pay all my bills on time!’, you might be saying.
‘I have a great financial history, so why would I check my credit score?’.
A spotless financial record sounds great, but this doesn’t guarantee you a good credit score.
Here’s the deal:
Errors within credit reports are uncommon, but they do occur. Errors which could impact your future chances of a loan approval without you even knowing about it. You might apply for a loan only to receive a higher interest rate than you expected, and be left scratching your head as to why.
A check of your credit score is also the best way to identify any fraudulent activity, such as identity theft. Which is a very real and growing concern for many New Zealanders. The last thing you want is the same to happen to you.
The best part?
Checking your credit score is super easy to do. Just CLICK HERE to check your credit score with CreditSimple!
If you want to dig a little deeper, you can request a copy of your credit report (this is what your credit score is based on) from any of the 3 New Zealand credit reporting companies listed below. They provide easy access to the same information that financial institutions will be look at when you submit your loan application:
So apply for a credit report, check your financial history, and stay informed. By doing so, you can address any errors long before you start dreaming of an approval, work on improving your credit score, and guarantee your first financial foot forward is also your best.
All of your credit score questions, answered
What is a credit report?
Credit reports are just that: a report into your credit history, based on your credit file. These reports often include personal and consumer credit information as well as your loan and repayment history.
What is a comprehensive credit report?
A comprehensive credit report gives credit providers the opportunity to include additional information about your credit history within your credit file, such as types of credit you currently hold as well as loan repayment information.
Will checking my credit file hurt my credit score?
No. Checking your credit file will not hurt your credit score. This is what’s often referred to as a ‘soft enquiry’, and has no detrimental effect on your credit score.
I defaulted on my payments, but I’ve since repaid the debt. So why hasn’t it been removed from my credit report?
Any and all defaults are marked on your credit report, and stay there for up to five years. Even if you’ve since paid the money back after the fact. Repayed defaults are, however, marked as paid, and go some ways to showing that you’re working to pay off your debts and improve your financial situation.
What credit score is needed to buy a house or car?
There is no magic number when it comes to credit scores and buying a house or car. Or any other personal good, for that matter. A poor credit score doesn’t necessarily prevent you from applying to a lender, but it will affect both the size of the loan, and the rate of interest you'll pay.
What is a good credit score?
The definition of a good credit score can vary dramatically between financial institutions. A good score in the eyes of one bank, might be an average score in the eyes of a credit union. Ultimately, it depends on the financial provider you’re applying to, as well as the credit bureau that they request a credit report from.
All credit bureaus within New Zealand use different scoring methods and metrics to decide on a final credit score. Veda, for example, utilise a 0-1,000 scale, where a credit score over 700 is usually considered above average, and would place you within the upper 50% of New Zealanders.
When does a credit score get updated?
Credit scores don’t follow any set pattern or schedule when it comes to being updated. This is largely down to when financial institutions forward any relevant or updated information regarding your credit to any number of New Zealand’s credit bureaus that keep your credit reports.
Does everyone have a credit score?
This one’s a tricky one to answer, as it’s both a ‘Yes’, and a ‘No’.
Let us explain further!
It works like this:
Not everyone in New Zealand has a credit score, but most adults who have taken out some form of credit - whether it be a loan, credit card or finance - will have a credit history, and therefore a credit score. So while it’s rare for an adult not to have a credit score, it’s definitely possible.
Why don’t I have a credit score?
Credit scores are based on the information contained within your credit file, so there’s a possibility you have very little or no recent credit history. Alternatively, you may have moved or relocated recently, which means your information may be held under a different name or address.
I’ve checked my credit score, so is this my only one?
No. In fact, you’ll probably find you have more than the one credit score. Each and every New Zealand credit bureau that holds a credit file about you will feature a different credit score, as not all financial institutions send out updates or revisions to all credit bureaus.
I earn a decent amount of money, so why is my credit score so low?
It’s a common misconception that your salary or income determines your credit score. Your credit history is the sole deciding factor when it comes to your credit score, which means factors such as income, investments (like term deposits) or assets aren’t taken into account.
Will my partner’s debt affect my credit score?
Your partner or family’s credit score will only impact your own if you have joint credit together, or if you’ve acted on another person’s behalf as their guarantor. Otherwise, your credit score is based solely on your own financial history, and not that of others.
Can I still apply for credit if I don’t have a credit score.
Yes, you can!
A positive credit score can help you get a better deal on your credit, however many providers also take into account a range of other factors when assessing your application. In a scenario where you have limited credit history or a bad credit score, a greater emphasis is placed on other aspects of your financial situation, such as your income and assets. You may also be able to have a friend or family member act as a loan guarantor.