When a home loan lender is checking you out as a potential borrower, they’ll take a long, hard look at your credit score, which is a number between 0 and 1000.
Lenders refer to your credit score because they need to ensure the loan they provide will be repaid. Having a high number could make all the difference between a ‘yes’ and a ‘no’. Your credit score isn’t the only factor a lender will consider, but it’s an important one.
This article looks at what contributes to a credit score and what sort of number you need to score a mortgage.
What is a credit score?
In New Zealand, your credit score is a number between zero and a thousand. It’s part of a wider credit report that includes your borrowing and repayment history for things like credit cards, overdrafts, hire purchase, car loans, personal loans, mortgages, utility (power, water, gas) contracts and phone contracts.
Your credit report is one of the first things a mortgage provider will look at when assessing your credit worthiness. It can affect how much they’ll lend to you and the interest rate they’ll offer.
New Zealand has three main credit reference agencies that collect credit data about you. They make this data available to lenders and utilities companies when it’s requested. Each agency has a different way of creating your credit score, so there’s no universal number.
What affects your credit score
Your credit score is typically based on a wide range of factors and events. These can increase or decrease your score, and some have a stronger influence than others. Each event’s influence on your score will decrease with time, giving more weight to recent ones. So a missed phone bill five years ago is unlikely to count for much.
Here are some of the things a credit reference agency might take into account when calculating your credit score.
- Late, missed or non-payments, including court fines: These will have a strong negative effect, particularly if they’re more recent.
- When your credit history began: A longer history is positive, but even a short history can result in a high score if the other content is positive.
- Your credit applications: If you ask about the cost of borrowing and a lender checks your credit score, it may appear in your report but it won’t affect your score. Only checks related to your loan applications matter. Your score can be affected by the types of credit applied for, how often you’ve applied and how long ago each application was made.
- Address changes: A more stable residential address record will help your credit score, because it typically represents a lower credit risk. Living for a short time at several addresses will often lower your score and a lender may ask why this occurred.
- Bankruptcy: If you have current or previous insolvency on your file, it’s seen as a strong indication of credit risk and may prevent some agencies from publishing a score at all.
What is a good credit score for a mortgage?
There’s no single answer to this, because your credit score is only one of the things a lender will take into account when considering your mortgage application. However, given the amount of money usually borrowed through a home loan, it’s fair to say you’ll need a higher score than you might to get a mobile phone account or credit card.
A score below 300 out of 1000 means you’ll find it difficult to qualify for a home loan. From 300 to 500, most lenders will view you as a risk and may not approve your application. Or they may balance the risk by only lending a small amount and/or charging a higher interest rate. The upside of a 300 to 500 score is that there are no major show-stoppers in your history, so you have a good opportunity to raise your score over time.
A score between 500 and 700 is considered average, so your chance of getting a home loan will depend on other factors and the lender’s own criteria. Anything over 700 will be well received by mortgage lenders. If you happen to have a score over 900, well done! You’re in the top 9.2%.
Of course, your negotiations with a new lender could mean they’ll agree to contribute to all or some of these costs. It’s common for bank and non-bank lenders to come up with an enticing offer to claim you as a customer.
How to check your credit score
It’s free to check your credit score with each agency, although some will charge if you need a credit report more urgently. Here are links to the three main customer-facing entities:
- Credit Simple, by ilion, shows your score online for free as soon as you sign up
- My Credit File, by Equifax, delivers a free online report within 10 days
- Centrix provides a free credit report usually the next working day if you provide New Zealand driver licence or passport details, or within 5-10 days for other types of ID
How to improve your credit score
If your credit score is not what you hoped for, there is some good news. New Zealand credit reporting regulations now require positive actions to be included when calculating a credit score, so it’s no longer solely focused on the negative things. That means you can start improving your score today, rather than simply waiting for the negative things to fade away with the years.
Here are some tips to get you started:
- Pay your bills on time – set up direct debits, so you don’t have to remember over and over again
- Get help with budgeting or consolidating your debts into one or two lower-interest loans and set up automatic payments to build a growing record of regular on-time repayments
- Check whether you can afford the repayments before you apply for a loan, so you don’t get needless applications on your credit record – use our mortgage repayments calculator
- If you move house or change bank accounts, be sure to notify all lenders and organisations that you pay money to, so you won’t miss a bill and have it recorded on your credit file
- Get your free credit reports and check them carefully to make sure there’s nothing that needs to be corrected
- Repay any debts you’ve defaulted on – it will still show as a default for five years, but the effect on your score will be reduced and you’ll look more reliable
To learn more
- For the low-down on getting a deposit together, types of mortgages, working out how much you can borrow and more, see our first home buyer’s guide
- For a handy summary of the steps to getting a home loan, from scanning real estate ads to signing up with a lender, see our guide to getting a mortgage
- If you run your own business, see our guide to getting a mortgage when you’re self employed