Buying a home can be like baking a cake—to get the best results, follow the recipe! One of the most crucial, but often overlooked, ingredients in gaining a mortgage is having, and keeping, a good credit score.
What Is A Credit Score?
A credit score is a way of measuring your financial soundness, and banks will look at it closely, as it indicates the likelihood of failing to make mortgage repayments.
It’s calculated from a number of sources including:
- Payment history on bills, or any hire purchase loans,
- How much you owe on any accounts i.e. credit cards,
- How long you’ve been collecting credit for,
- The types of credit you have—do you have lots of personal finance loans? Or do you have more than one credit card? and
- How often your credit history is checked.
Credit cards, mortgages, car finance and hire purchases, as well as household bill payments, can be used to calculate the score.
What Makes A Good Credit Score?
All scores sit between 0 and 1000.
According to New Zealand company Credit Simple, a score higher than 600 is excellent—it shows you pay your bills on time, have done so for many years, that you likely have a mortgage and never miss repayments.
The average Kiwi score sits between 401 and 600—this shows you generally pay bills on time, and have an average number of queries on your credit. People who have relatively new credit, and have only dealt with a power or broadband provider are usually within this bracket.
Anything under 400 is a red flag and points to late or non-payments and any disputes around credit.
How Can I Improve My Credit Score?
Generally, information about your credit history is kept for up to two years, and any unpaid debt, or debt collection, can appear for up to five years, even if the debt is paid off in full.
A bad credit score can result in a mortgage application being declined, especially if you have a deposit of less than 20%.
The good news is you can always build a better score, there are simple ways to improve it:
- Ensure you pay all your bills on time,
- Avoid taking out lots of small loans, or hire-purchases,
- Clear any bad debts that are against your name.
We always recommend getting familiar with your credit score, there are multiple ways you can look it up, including online sources, or requesting a free report through Equifax NZ.
If you have any questions about credit scores and how they can affect your mortgage chances, give one of our friendly team a call today.