Posted September 2016 by NZCU Baywide
What is a credit score, and how will it affect my personal loan application?
Applying for a loan is an exciting time for any New Zealander. Or at least, it should be. Maybe you’re planning on expanding or renovating your house. Spending a weekend away enjoying the sun, surf and sand? Or perhaps even purchasing a car. No matter what you plan to do with it, a personal loan offers the financial freedom to realise your dreams and make those long-held ideas come true.
Unfortunately, this isn’t always the case.
Your credit history, and your resulting credit score, can impact your ability to obtain a loan. As well as the interest rates on offer. Do you know what your credit score is? Maybe you’ve had a rough financial history, and you’re struggling to gain approval? 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. This level of uncertainty can have a long-lasting impact and add unnecessary stress to your daily life.
This is why today we’re bringing you up to speed on everything you need to know about credit scores, as well as how your score can affect your application for a loan, finance, or other forms of credit. If you’ve ever found yourself with a question about credit scores, you’ll find the answer below!
What is a credit score?
Your credit score is based on your credit history, and acts as a numerical representation of how financially responsible, reliable and trustworthy you are in the eyes of financial institutions when it comes to paying back your loans, and paying off your debts. The lower your credit score, the higher your interest rates, and the greater the possibility that your application will be rejected.
You see, credit unions, banks and other financial providers take a methodical approach to the process of lending you money. To them, the best predictor of future outcomes is your past behaviour. Take the following as an example: you lend your car to a friend for the weekend, only for them to return with 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.
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 in New Zealand is accessed by financial institutions via Centrix, Dun & Bradstreet, or Veda Advantage when you apply for a loan or credit.
How are credit scores calculated?
Your credit score is calculated based on both the positive and negative financial history found within your credit file. If you pay off your loans on time and consolidate all of your debts into one, your score will improve. Miss bill payments or default on your loans, and your score worsens. It’s a system that rewards prompt payments and low debt, and penalises late payments and financial instability.
Of course, it’s a little more complicated than that. In fact, 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 discovered, a credit score is far 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 be able to repay a loan or credit in the future. This allows lenders to determine:
- Whether you can borrow.
- How much you can borrow.
- The interest rate that you’ll pay on the loan.
A high credit score instills more confidence in a lender. Just like a good review might mean you’re more likely to buy a product or watch a movie. If you have a high credit score, lenders can be confident that you’re reliable, that you make payments on time, and that you’ll see your loan through to completion. In turn, you’re more likely to have access to a larger personal loan at a lower interest rate.
On the other hand, if your credit score is low, you’ll likely pay a higher interest rate and be limited in the amount you can loan. But while your credit score is an important factor, it isn’t all doom and gloom: this is only one part of the much larger process a provider goes through when considering your application. Your job, your income or salary, your length of employment as well as monthly expenses can also play their part in whether your application is accepted, as well as the rate that it’s offered at.
Regularly checking your credit score is a good idea. Here’s how.
‘I pay all my bills on time’ you might be saying, ‘and I have a great financial history. So why would I check my credit score?’. This is a common misconception. Sure, you might have a spotless financial record, but this doesn’t mean you shouldn’t still keep up to date on your credit score.
Errors within credit reports are uncommon, but they do occur. Errors which you may not be aware of but could impact your future application for a loan 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.
Checking your credit score is easy. With a service like CreditSimple, you can simply log on and check your credit score online right now, completely free of charge. You can also order a free copy of your credit report, which your credit score is based on, from any one of the 3 credit reporting companies within New Zealand listed below. They provide easy access to the same information financial institutions will be looking over when you make your application.
So apply for a credit report, check your financial history, and stay informed and up to date. This way you can address any errors before your application, work on improving your credit score, and guarantees that your first food forward is also your best.
Frequently asked questions (FAQ) on credit scores
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 for a loan for a car or a house, but it will impact both the size of the loan on offer and the rate at which you’ll pay interest.
What credit score is good?
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. This is all dependant 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 it comes to your credit score.
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: while not everyone in New Zealand has a credit score, 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.
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 often take into account a range of factors when assessing your application. In a scenario where you have limited credit history, a greater emphasis is placed on other aspects of your financial situation, such as your income and assets.
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.