A credit score is essentially a measure of a borrower’s ability to pay back a loan, based on previous loans or financial obligations. A poor credit score makes you riskier to lend money to, which can affect your ability to get a mortgage or increase the interest rate you are offered.

Your credit score takes into account credit cards, overdrafts, all loans (including personal loans and payday advances), hire purchases, and can include your payment history for electricity bills and phone bills if they’re offered on credit – which most are.

Information is kept on your credit report for up to two years, and if you’ve ever defaulted on a payment – which means you were more than 30 days late and the company had to take steps to get you to pay – that default stays on your record for up to five years, even if you paid what you owed.

Your report measures a number of different factors:

• Length of credit history
• Types of credit you use
• New credit
• Payment history

Risk factors for lenders include:

• Opening a lot of new accounts in a short time – this indicates you might be in financial trouble.
• Short lived accounts – this indicates you might be a risk for breaking the loan early.
• Number of defaults – lots of defaults means you’re not very good at managing your money.
• A short credit history – this makes you an unknown quantity, lenders prefer to have lots of information on you.

You can check your credit score by going to the three credit report agencies in New Zealand: Equifax, Dun and Bradstreet, and Centrix. You are entitled to a free copy of your credit report, so if you’re ordering it off the agency’s website make sure to choose the free option.

If you find your credit score isn’t what you would like it to be, you can take steps to improve it.

• Pay your bills – make sure that you always get your bills paid on time. Set up automatic payments or create reminders for yourself.
• Pay down your debts – work on owing less money in general; pay off credit cards and personal loans, and don’t open any new accounts.
• Keep your accounts open – even if you don’t use your credit account, keep it open so it shows that you have a credit history.
• Check that your credit report is accurate – request your report from all three providers, and make sure there are no mistakes on your report. If you find any errors, you can dispute them and have them removed from your credit report.