Credit score is something a lot of people tend to ignore. But knowing about it is very important because it is one of those things that eventually sneaks into your life and ruins all the fun. If you want a future with certain assets in it to make you comfortable and happy, such as a house, a car, money for your children to go to college, etc., you have to get a loan or invest in the fundamentals of your finances.
Knowing about your credit score is very important as it can be used to assess whether you can repay your loans, which you can then utilize to significantly improve your financial situation. All in all, your credit score may mean the difference between getting a loan or not.
What is a Credit Score?
Your credit score is an important piece of information that helps lenders when they are assessing creditworthiness for any kind of lending. It takes into consideration whether you are likely to repay the loan in full or pay your bills on time.
How Credit Score is Determined?
Credit-reporting agencies calculate and maintain your credit score. Higher credit score means better credit profile. Better credit profile has several benefits including lower interest rates charged by your money lender or creditor.
Your credit score is divided into several categories such as payment history, length of credit history, amount owed, new credit, types of credit debt used, etc. Different companies take different factors into consideration. Credit bureaus operating in New Zealand collect information to determine your credit score. They then provide this information to lenders that request it.
Bad Score? Bad News
You may already know that bad credit score can affect your ability to get more credit. What you may not know is that it can affect various other aspects of your life as well. For example, it may encourage a potential employer to inspect your past business habits more carefully and reassess hiring you. This is because bad credit score reflects poor reliability on your part as an employee.
There are some certain aspects of your lending behavior or credit history that may affect your credit score negatively. When your credit score is negatively affected, your credit risk to the lending company is increased, hence ultimately increasing your interest rates.
Following are some common risk indicators;
- Not paying your installments and bills on time
- Opening lots of new credit accounts in a very short time
- Short-lived accounts
- Defaulting on payments
- A short credit history
How Do You Improve Your Credit Score?
If you have a bad credit score, don’t lose heart because there are some things you can do to improve your credit score over time. The first thing you should do is sort out your debts. If you are experiencing problems in meeting the requirements of loan repayment, find ways to get back into a regular payment cycle. By showing a clear record of repayment over a period of time, you can demonstrate (via repayment history) that you have reformed your credit behavior. Over time, your past credit problems will become less relevant and your recent payment patterns will become more relevant to your credit score.
It is important to remember that banks aren’t the only credit providers. Utility or telecommunication companies are also credit providers. This means you have to make sure that all of your bills are paid on time.
Tips and Facts
Following are some useful tips and facts regarding credit score:
- If you are thinking about making a big purchase (house, car, etc.) for which you have to apply for loan, then it is recommended that you ask the lender for the type of credit score they use. By doing this, you will be able to determine how your credit score will affect this purchase as well as your future loans or purchases.
- Different financial institutions and companies use different indicators to determine whether or not you will receive a loan. Some of the factors that may be taken into account include your age, income, lending history, net worth, employment history, etc. These factors are weighted differently in different companies.
- If you are planning on getting married, then it is recommended that you look at each other’s credit scores so you can work out what you will both collectively owe, how to pay it off, as well as how your credit score will be factored into your budget.
- If you have a feeling that your credit score may not be so great, keep in mind that you can always make a comeback. The first step is to evaluate your situation and find ways to get your finances in order.