When it comes to borrowing money or applying for credit, your credit score is a crucial factor that lenders and financial institutions look at. So, what are credit scores? And how can you improve yours?

Here are some key things to know, according to our SHARE advisers.

Credit scores in a nutshell

In short, your credit score is a three-digit number that represents your creditworthiness. It’s calculated based on your credit history, including your payment history, outstanding debts, length of credit history, and credit utilisation.

Checking your credit score is an essential step in understanding your financial health, and if needed, improve it. You can obtain a free copy of your credit report, once a year, from one of the three main credit reporting agencies in New Zealand: Equifax, Illion, and Centrix. You’ll just need to provide some personal information to verify your identity.

How does a good credit score help?

The higher the credit score, the more creditworthy a person is considered. This indicates to your lender that you’re likely to repay your debts on time and as agreed. So, a good credit score increases your opportunity of being approved for a mortgage, a car loan, or a credit card – and it may even result in lower interest rates and better loan terms.

How to improve your credit score

If you’ve looked at your credit score and think it may need a boost, here are some practical steps you can take (if possible and relevant):

• Pay bills on time: With many commitments to meet at once, it can be easy to fall behind or forget due dates. But remember: payment history is the most significant factor in calculating credit scores. Late payments can significantly lower credit scores, and even one missed or late payment can have a negative impact. To ensure on-time payments, it could be a good idea to set up automatic payments or reminders, and prioritise payments for essential bills, such as rent or utilities.

• Reduce your credit card balance: Credit utilisation (the amount of credit being used compared to the available credit limit) is another crucial factor in calculating credit scores. A good rule of thumb is to keep credit utilisation below 30% of the available credit limit. By paying more than the minimum payment, or making multiple payments each month, you can reduce your credit card balance and improve your credit score.
  
• Avoid applying for too many credt facilities: Opening too many new credit facilities within a short period can lower credit scores. It may indicate a high credit risk, as lenders often view it as a sign of financial stress or instability. The solution? Space out credit applications and only apply for credit when necessary.
  
• Keep old accounts open: Another factor in calculating credit scores is the length of credit history. By keeping old accounts open and in good standing, you can demonstrate a longer credit history and responsible credit management. On the other hand, if an old account has a high annual fee or is no longer being used, you may want to close it.

• Build a positive credit history: Establishing a positive credit history is a great way to improve your scores. This can be done by taking on small amounts of credit and making timely payments, for example by applying for a small credit card or a store card.
  
  
• Check your credit report for errors: Yes, credit reports can contain errors, like inaccurate credit limits or incorrect account information. Make sure you check your credit report at least annually, and dispute any errors you find: your credit score will likely benefit from it.

Like to learn more?

When it comes to applying for a mortgage, we can help you understand the impact your credit score may have on your application. And remember: by practising good financial habits, you can improve your credit score over time, which is an important consideration for mortgage approvals.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.