Your credit score: How important is it?

There's a lot of misinformation floating around about credit scores.

The first problem is how much personal finance information on the internet comes from the US.

The second issue is that companies don't exactly make it an easy issue to understand.

You could almost be suspicious that lenders prefer the credit system stay a bit murky and confusing for customers.

Lastly, our credit system has changed in the past few years. But the good news is, the changes have been for the better.

Here are the main things you need to know.

You can boost your credit score quickly by making extra payments:

Before 2012, lenders only kept a record of missed payments, late fees and high levels of debt. But now, positive credit reporting means a switch to good behaviour will also be reported and can balance out past misdeeds much faster. Now they take into account if you have a good track record of paying bills on time, so that one mistake doesn't throw everything out of whack.

You don't have to have a credit card to have a good credit score:

Having a credit card and paying it off every month is an easy shortcut to a good credit score. But many people are wary of credit cards, and for good reason.

Studies show a credit card can lead to you spending anywhere from 70 per cent to 100 per cent more than if you were buying with cash. You can also build up a good credit score with prompt payments to your mobile phone plan, or for utility bills like electricity.

If you have a car loan, mortgage, or hire purchases, those are also forms of debt that they'll take into consideration.

Pay them off on time, or even early, and watch that credit score shoot upwards.

You can check your credit score without handing over personal data to random companies:

Lots of companies will offer to check your credit score for you, but asking for too many third party credit checks can throw a red flag on your history, and itself lead to your score going lower.

Go straight to the source and get the information for free from the three credit reporting companies in New Zealand: Centrix, illion and Equifax. You're not going to be perfect, so don't try: You credit score will be anywhere from 0-1000, but perfectionists, take a breath. There will always be something to bring you down a peg.

A score between 500-600 is considered normal, while anything above 700 is above average.

If you get a result in the 800+ range, give yourself a pat on the back and move on.

Your credit score won't be the only factor in consideration: A credit score is used when deciding to give you a loan. It can determine how friendly the company is, and whether you get a cheaper interest rate. If you're a good bet that they think is more likely to pay them back, you'll get a better deal.

It can also be used when you're applying to rent a house, get insurance, open a bank account, or even when applying for some jobs. But because they're trying to figure out how safe you are to work with, they'll also use other information. How much money you make, your expenses, and any other assets or property that you own, will all be taken into account.

When you remember that they're trying to figure out how safe you are to lend to or work with, the system makes more sense.

The Herald’s Cooking the Books personal finance podcast is here to get you the tips you need to weather the financial storm. Hosted by Frances Cook, with a new expert on each episode.