Credit scores - how do they work?

Credit scores and how they work remain a mystery to many kiwis. Most people have no idea what their credit score is and only find out that they have a bad credit rating when they are charged high interest on a loan.

Is there a magic number that means you can get credit or not? We want to let you know exactly how credit scores work and how they can affect your loan so you can successfully apply for finance. 

What is a credit score?

A credit score is a way of quantifying how good you are with your finances. In New Zealand, your credit score is a number between 0 - 1000, and the higher your number is, the better. The average credit score might be anywhere from 350 - 800.

Essentially, this number is designed to show how likely a person is to pay their bills on time and how reliable they are with their finances.

Repayment data is collected by New Zealand credit bureaus to calculate your credit score. Companies can then request this information when you apply for a loan. However, you have to provide your permission before another person or company can perform a credit check on you. 

What is a credit score made up of?

Things that affect your credit score include how much money you owe, your payment history, how much you want to borrow, length of credit history, and more:

Here's the full breakdown:

35% - repayment history, such as how many times you've made late payments.

30% - total debt. If you're already in a lot of debt, it may be hard to get another loan.

15% - length of credit history. Many people think that if they're never had a loan, they'll have good credit. However, if you've never borrowed, there's not a lot of information to use to suggest that you're making repayments. The longer your credit history, the better.

10% - credits used.

10% - new credits.

Who might need to check your credit score?

A credit score is not just used by money lenders but many other companies as well. Your credit score will be important when applying for things like a mortgage, loan, or credit card.

Other companies such as phone and power providers as well as insurance companies might also check your credit score before you can sign up for their services. They want to make sure that you're likely to pay your bills on time, even though you're not borrowing from them.

How can you check your credit score?

It's free to request a copy of your credit record, and this can provide you with some insight into whether a lending company might be willing to offer you a loan. Check out where you can request your credit score on the NZ Government Website.

Be ready with your ID handy as you'll need to enter your personal information as well as proof of identity.

How can a credit score affect your loan?

If your credit score is high, this can make it easier to get your loan application approved, as lenders can have confidence that you'll be reliable with repayments. You may also be offered a lower interest rate than those with a bad credit score. Many lenders also give more flexible payment terms and can loan larger amounts to those with good credit. 

If you don't have a great credit score, this doesn't necessarily mean that you're ineligible for a car loan. You may just be able to borrow less, or you might be asked to put up more security for the loan. 

Can having a car loan affect your credit score?

Yes, having a car loan can affect your credit score. It all depends on how much you owe and how good you are with your repayments. 

What to be aware of:

• Multiple debts - If you have many other loans such as a mortgage, other car loans, personal loans, etc, then adding another debt into the mix can negatively affect your credit score.
• Repayments - Make your repayments on time, and you don't need to worry about your credit score getting worse. It might actually improve! 
• Numerous applications - If you're thinking about putting in applications with a few different lenders to see what they'll offer you, you might want to reconsider. Having many applications with various lenders can lower your credit score. You're better off checking out lenders' sites and deciding on just one lender you'll apply for finance with.

Applying for a car loan

Financing a car can be a great way to improve your credit score, especially if you've never had a loan before or you don't have much credit history, as long as you make your repayments on time. Find out how much you might be able to borrow and at what interest rate by applying online with Stadium Finance. 

If you haven't yet chosen the car you want to buy, you're welcome to apply for preapproval to see how much you can borrow before you start searching for your ideal vehicle. 

For those who have great credit scores, we can offer great interest rates. As you can see, working on improving your credit score is worth it, as you can pay less on your loans over time. 

Apply for a car loan with Stadium Finance today!