Do you know a good credit score, and why does it matter?
Your credit score is from 0 to 1,000, indicating your creditworthiness and your likelihood of repaying debt on time. Most credit scores vary between 300 and 850. The higher the score, the higher the credit rating.
Higher scores can assist you obtain loans for business from traditional banks however private lending institutes do not put the same importance of a credit score when assessing business loans. However, a poor score may make companies reluctant to lend you a loan or charge a higher interest rate. This guide will help you understand what good credit is and why it is important.
What is a good credit score?
Credit scores range from 0 to 1,000 or 1,200 depending on the credit bureau. In any case, the higher the score, the better it is. For your convenience, we have provided the table below to help you understand what good credit is in New Zealand, bureau by bureau.
Credit Score Range
People with credit scores in the 666 to 755 range are more likely than the average consumer to have a solid credit report in the next year. Good credit is pretty sound and lets lenders know you are not vulnerable to significant financial setbacks and can pay back quickly.
Why is good credit essential?
Credit score and credit report are the two most important variables that traditional lenders consider when evaluating a small business loan application. This information tells them their credibility as borrowers based on their credit history.
Borrowers can increase their bargaining power by taking steps to improve their credit so that they are recognized as low-risk applicants. It means that applicants with lower scores are more likely to get rejected by lending institutes.
If you have a good credit score, you may be able to negotiate the terms of the loan, such as the interest rate, with the traditional bank lenders. You can use the credit report to prove your creditworthiness and claim that you will not be a risky borrower since you have not been so even in the past.
What are the pros of a good credit score?
The advantages of a good credit score are as follows.
1. Lower interest rates on credit cards and loans for business
Interest is one of the costs you pay to borrow money, and the interest rate you get is often tied directly to your credit rating. You will more likely to get the best interest rates if you have good credit. That means lower credit card balances and lower financing fees on loans. The less interest you pay, the faster your debt will be paid, leaving more money for other expenses. The total cost of the loan will significantly come down.
2. Improved bargaining power
Good credit allows you to negotiate lower interest rates on your credit card or business loans if you still need to get the best interest rate. You have to choose from more deals and lenders that can give you more bargaining power. With a good credit score, your options widen. Compare all the arrangements and choose the one that benefits you the most.
3. The higher your credit score, the more likely you are to be approved
Your credit score is dependent on your income and credit history. One of the benefits of a good credit score is that banks are willing to lend you more money because you have proven that you will pay back what you borrowed on time. Your credit report shows that you are a less-risky borrower. So, the lenders will be less-reluctant to lend you a massive sum of money.
4. Increased chances of credit card and small business loan approvals
Borrowers with bad credit histories often refrain from applying for new credit cards or loans because they have been previously declined. A good credit score indeed pushes you closer to approval. It means you can apply for loans and credit cards with more confidence.
5. Easier access to premium credit cards
One of the first things a lender considers before approving a credit card application is the applicant’s creditworthiness. As a result, credit card companies are increasingly inclined to grant such applicants access to premium credit cards that offer better rewards in the form of reward points, cashback, privileged services, etc.
How do you improve your credit score?
Check the credit score, and do not panic if it is not as good as you thought. Each lender has a different rating, and what is considered a “bad rating” for one lender may not apply to another. There is no national “blacklist” of borrowers. If you have a problem with a lender, do some research. You can take specific steps on your own to improve your credit score. These are:
Check your credit history for errors, and continue to check annually. If there is a problem, contact the credit bureau where the problem was submitted to have it corrected. It will affect your creditworthiness. Be careful about
- Credit accounts you never applied for
- Defaults you did not know
- Small business loan applications you rejected
If you need to catch up on loans in the past and can pay now, do so. Once paid, adverse effects are reduced (but not eliminated). If you owe money and cannot pay it off, contact your moneylender. It is better to have a plan and take advantage of every payment than to give up and hurt your credit score.
In the long run, improving credit is more complex but more critical. It would help if you achieved the following goals:
- Pay off your current business loan and build a good repayment history.
- Take as little debt as possible. Set a budget and save on items instead of using a credit card.
- Data is kept on file for a limited period (4 years at the time of writing), so a mistake made ten years ago will not affect your score today.
A score between 726 to 832 is considered to be a good credit score. It comes with many benefits, such as better chances of loans for business approval, low-interest rates, and more negotiating power. Maintaining a healthy credit report and improving your score is achievable if you take the steps discussed here. However you can also obtain a private business loan from private lenders who do not require a good or clean credit score to approve their funding.