Credit score. Two small words with the potential for a big impact on your financial plans.
Let’s go back to basics. Here’s a beginner’s guide to credit scores, so you can try to make sure yours is in the best possible shape.
What is a credit score?
Your credit score is a number - usually somewhere between 0 and 1000 - determined by a credit bureau based on all the credit information they have collected about you.
The higher the number, the better your score. Companies you enter a financial relationship with, such as Harmoney, may request your credit score to help develop a clearer picture of your credit history. Your credit score helps lenders quantify your credit risk against everybody else with a credit file.
Your credit score is one of the things lenders will take into account in determining your loan terms.
Ok then, but how’s that different to my credit file?
Your credit file is your credit history, while your credit score is a number that summarises all the information held in your file.
Your credit file is a comprehensive list made up of all the credit transactions and credit relationships you’ve had. It also includes any defaulted loans and missed payments which will stay on your file for five years in the case of defaults and two years in the case of missed payments.
Other things in your credit file is identifying information such as your name and address, as well as hardship applications, finance-related court records, previous credit checks.
The good news is at Harmoney we use Comprehensive Credit Reporting which means we take into account the positive aspects of your credit file. These include bills paid on time and debts paid off, which can have a positive impact on your credit score.
Your credit file helps lenders try to predict how much of a risk you are as a borrower, based on your previous financial history. It is information that assists lenders in making decisions about your loan, but it is not the only information considered.
What’s not in my credit file?
Items not recorded in your credit file include:
- Salary - although you will most likely be asked for this when applying for credit
- Personal information such as race, marital status or religion
- Traffic fines such as parking or speeding tickets
- Student loans (unless you have defaulted on payment)
So what’s a credit check?
A credit check is when a company such as Harmoney requests your credit file so it can use that information in helping to determine your loan terms. A recent law change means you are now able to get a quote on your loan terms with Harmoney, which means we can check your credit history with a quotation enguiry. This type of credit check is recorded in your credit file but cannot be used by a credit bureaux in determining your credit score. The credit check will only impact your credit score if you choose to progress from a quote to a loan. This is the new industry standard for lenders such as Harmoney which offer a range of interest rates.
Why should I care?
Your credit score and credit file can impact many areas of your life. It can be used to determine if you’re eligible for a personal loan, or mortgage as well as credit cards, hire purchase agreements, utility providers and mobile phone companies. Sometimes part of your credit history can also be referred to by prospective landlords or employers.
You might want to think about finding out your credit score, or what’s in your credit file, before you need to - so you have time to improve things if need be. It’s also a good idea to check your credit file for incorrect information.
If you find something in your credit file you think is wrong, start by reporting the error to the credit bureau from which you received the credit file. You can find more information on your rights around the information in your credit file from the Privacy Commission.
How can I find out what mine is?
You can get your credit score by contacting one of the three credit bureaux in New Zealand, which are Equifax, illion and Centrix.
In New Zealand you are entitled to know your credit score and the contents of your credit file for free. If you require your report urgently there may be a fee attached.
Asking for your own credit score or credit file does not impact your score.
It’s also worth noting that your score may vary between credit reporters because they may not all have had access to all of the same information about you. To get an accurate view of your credit score you should talk to more than reporter.
Harmoney bases its loan applications on credit reports from two different credit reporters - Equifax and Centrix - for each application.
Woah! My score is low. Can I improve it?
Absolutely. Comprehensive Credit Reporting means you can most likely start to have an impact on your credit score with positive behaviours quite quickly.
The key thing will be to start paying down debt where you can. A thorough look at your accounts should help your determine exactly how debt you have in total. Would it be cheaper to consolidate into one loan?
Think about clearing debts with highest interest rates first, and ask yourself if you can afford to pay more each month toward clearing debt.
Make sure any bills you do have are paid consistently, with the full payment amount each month, and on time. Setting up a direct debit each month to do this can be helpful.
While having a large credit card debt can negatively impact your credit score, using your credit card regularly and paying it off each month should have a positive impact on your score as it demonstrates responsible borrowing.
If you think you may have trouble meeting your commitments with a particular lender or creditor, contact them before payment is due, to see if you can modify your payment terms rather than being late or defaulting.
How does Harmoney use my credit score?
At Harmoney, your credit score is one of the tools we use to determine your grade. After we have assessed your financial situation based on all the information provided as part your application, you are assigned a grade from A1 to F5. Each grade has a corresponding interest rate and maximum borrowing limit assigned to it. This is how we determine the personalised loan terms you will receive in your loan quote.
Up next in Credit Score Bootcamp: