Lifestyle / April 22nd 2021

How Does Credit Work in NZ?

Sizing up your credit rating

Credit scores are an essential playing factor when you want to apply for a loan in NZ. Your credit history can impact your loan application when you plan to buy a house, renovate your home, pay for medical bills, or even purchase a flight ticket to a specific destination. Credit scores have a significant impact on your life, but what if you want to apply for a loan with bad credit?

Whether you have good credit, bad credit, or no credit at all, we will run through the information you need to understand how credit works in NZ and how you can boost your score to better your chances when applying for car finance, housing loans, and more.

What exactly is “credit”?

Credit is generally defined as a contract agreement wherein a borrower receives a sum of money from a lender, and agrees to repay that lender at a later date with interest. Credit may also refer to an individual’s creditworthiness or credit history (in other words, the amount of trust they’ve earned when it comes to borrowing money). Let’s first look at the important terms regarding credit.

  • 1. Credit history – Credit history tracks all your loan transactions from the very beginning. This includes all your payments, missed payments, mortgages, and defaults.
  • 2. Credit records – This is a summary of your credit history, including your credit rating or score.
  • 3. Credit check – The process wherein lenders review your credit history.
  • 4. Credit score – This is a single number, usually a rating out of 1,000, calculated based on your credit history. Your score gives lenders a way to gauge whether or not you’re a reliable borrower. The rule is the higher your credit score, the better deal you’ll get when it comes to loans and interest rates.
  • 5. Credit score providers – These are companies that provide credit scores using data from one or more credit reference agencies. In New Zealand, the official credit score provider is Credit Simple.

Why are credit scores important?

Like we’ve mentioned above, your credit score affects your chances of securing a loan, the amount you can borrow, and the interest rate you pay. If you want to renovate your home, purchase a car, or pay for medical bills, you may need to apply for a personal loan, the conditions of which will be more favourable with a good credit score.

How are credit scores in NZ calculated?

Your credit score will be calculated based on your credit file. This means it will take into account all your loans and whether you make monthly repayments on time. If you regularly pay and consolidate all your debts into one, your credit score will be higher. If you miss your monthly payments or default on your loans, your credit score will go down. Your final credit score will also factor in the following:

  • - The average age of all your accounts
  • - The age of your current line of credit
  • - How active your accounts have been
  • - Overdue or late payments
  • - Payment history, including electricity and energy bills
  • - Court judgements against you for outstanding debts

While your credit score is a vital factor in loan applications, lenders will also consider your current employment status, income, length of employment, and your monthly expenses.

Who checks your credit score?

Lenders or businesses will request a credit check whenever you apply for a loan, a credit card, mortgage, car finance, insurance, and rental accommodation with them. Lenders or businesses will ask for a credit check, with your consent, to see how reliable you are with money. If they see your credit history is too risky for them, they might reject your application.

What number is considered a good credit score?

Most credit scores are between 300 and 850. However, a good credit score is different for each financial institution. A good score in the eyes of one bank may be an average score in the eyes of a credit union. In New Zealand, all credit bureaus use different scoring metrics to decide on a final credit score. A credit score over 700 is considered good. If you have a credit score above this number, it places you within the upper 50% of New Zealanders.

How to improve your credit score?

If your score runs below 300, you may consider yourself someone with bad credit, but don’t fret. If you have bad credit or don’t have any credit at all, you can take actions to improve your credit score. Here are some of them:

  • • Make monthly repayments and bill payments on time.
  • • Pay your credit card in full.
  • • Review your credit scores to ensure the information they have is accurate and fix errors before applying for a loan.
  • • Limit credit card applications that can negatively impact your score.
  • • Cancel unused credit cards and accounts.
  • • Wait for the time limits before applying for new credit.

Can you still apply for credit without a credit score?

The short answer is yes. Individuals with little or no credit history may still apply for credit. Loan companies for bad credit exist. And those who have limited credit history may find themselves partnering with lenders who put a great emphasis on other aspects of your financial situation, such as your monthly income and assets.

Know your options with MoneyShop!

Now that you know how credit works and how your credit score almost always affects your financial options. Remember, a positive credit score can help you obtain a loan with the most favourable terms. But don’t worry if you’re applying with bad credit or limited credit; hope is not lost! We at Money Shop can assess your financial situation to accommodate your needs. We offer fast and easy NZ loans between $200 to $20,000. Learn how we can help you obtain a personal loan and a credit check. Meet the friendly face of finance, and contact us today!

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