First things first In fact, lenders like Harmoney, are more interested in your credit file, than your credit score.
Your credit file contains the detail of your credit transactions - the good stuff, like all those bills you’ve paid regularly on time and in full, and the less good stuff, such as any defaults, late payments, court orders and bankruptcies.
Your credit score is all that detail up summed in a number, as a quick guide to your creditworthiness. It also helps tell lenders where you sit in relation to the rest of the credit file holders in New Zealand.
Your score is also a useful and important tool for you to measure your own creditworthiness ahead of applying for financial products such as a personal loan. It can be an indicator that something is amiss in your credit file, or that you have outstanding bills to pay.
Why your file is important
Your credit file helps us paint a picture of who you are as a borrower. Looking at what kinds of credit you have had in the past and how you have managed that credit, helps us predict how you might manage a loan in the future.
It’s one of the reasons credit scores can improve as you age. A longer history contains more information and the more information in your file, the more accurately your behaviour can be predicted. As you get older you are also more likely to have been through life events pertaining to credit, such as buying a house or having utilities in your name, and you've had the chance to manage them through life's ups and downs such as job changes, getting married and having children.
Harmoney evaluates the information in your credit file, with your credit score and the financial information you provide on your loan application, to determine what your interest rate and loan amount will be, should your application be successful.
We do that to try and ensure you have a loan you can afford to repay.
Good behaviour matters
In some ways your credit score, and through it your interest rate and loan amount, respond to your behaviour in similar ways to an insurance premium.
For example, two people might own the same car but have very different driving histories. A car owner with a driving history free of accidents and insurance claims, will be eligible for a better (lower) insurance premium, than an owner who has had several accidents for which they’ve made claims.
Someone showing a good credit history in their credit file, free of defaults and late payments, will have a better credit score than someone with a credit history showing overdue payments and defaults.
You and a friend may earn the same amount of money and both apply for a loan, but receive very different interest rates and loan amounts, because of the differences in your credit history.
To sum up …
- Your credit file is a record of your credit history - the good and the bad.
- A credit score is a simple number that reflects your credit file - a high credit score indicates a good history managing credit.
- A good credit score is useful because it could provide more options and lower interest rates to a borrower, due to the good underlying credit history.
- Keeping track of your credit score can alert you to problems in your credit file. This can give you the opportunity to improve the contents of your credit file (and your score) before you apply for credit products such as a personal loan.
- If your credit score is lower than you expected, or would like, don’t panic. In most cases your credit file can be rehabilitated by good behaviour over time, and that will make your credit score improve.
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