Credit can be just as detrimental as it can be beneficial. It can help you purchase a home or get a lease on an apartment, it can help you buy a car, or it can paint you as a big red target to creditors. Credit helps you build a credit score — but what exactly is a credit score and how can you get a good one?
What is a credit score?
A credit score is a 3-digit number, usually between 300 and 900, that represents how trustworthy you are to credit bureaus. They allow creditors to know how likely you are to follow your payments. According to Equifax, one of Canada’s two biggest credit bureaus, credit scores are calculated using public records from lenders (banks, collection agencies, credit card issuers) such as your payment history, amount of debts you have, and the length of your credit history. Higher scores tell creditors that you are responsible, and lower scores might lead to creditors refusing to provide you with their services.
Why are credit scores important?
Consumers should pay close attention to their credit scores because good credit scores can greatly help in securing yourself certain services. Typically, when you apply for a loan, lenders will look at your credit score to determine whether you should be approved for it. In fact, a good credit score can get you approved for mortgage, a car loan, personal loans, or in certain cases, student loans!
What’s more is that they can even help you get more competitive interest rates. Because lenders will see that you are responsible, they may offer you a lower interest rate. On the other hand, if you have a bad credit score, the lender will feel as though they need to guarantee returns with a higher interest rate. The higher the risk, the higher the rate. This means that if you have a favourable score, you’ll likely pay much less in the long run.
Although it’s important to keep track of your credit score, it is worth to note that different lenders may look at different facets of your credit report in order to determine whether or not you qualify for a loan. For example, an auto lender might look at your payment history rather than the totality that makes up your credit score. After all, what matters to them isn’t how much you’re indebted, but rather whether or not you’ll make your full payments on time.
What is a good credit score?
Although credit scores range from 300-900, good credit scores typically range between 650-900. In fact, according to Spring Financial, the average Canadian credit score ranges between 650-725. This means that any score above 650 will typically guarantee you a loan. Any score below that is considered below average, and you may find yourself having trouble securing a loan. In order to find out how your score fairs, follow the ranges below:
- 300-579: Poor
- 580-669 - Fair
- 670=739 - Good
- 740-799 - Very Good
- 800+ - Excellent
How is your credit score calculated?
As mentioned above, a credit score is calculated using public records from lenders. These public records include:
Your payment history
Your payment history is usually the biggest contributor to your credit score. It tracks all of your payments and whether or not you’ve paid them on time. It also tracks how often you’ve missed payments as well as whether your debts were sent to collections. Payment history usually accounts for about 35% of your total score.
Your available credit
The second biggest contributor to your credit score is the amount of available credit you have versus how much you’ve used. It includes credit cards and any other type of revolving credit. This usually account for about 30% of your total score.
Credit history
Your credit history tracks the age of your credit accounts. Oddly enough, newer accounts will generally score less because creditors like to see how you’ve been able to handle your credit over a longer stretch of time. The older the account, and the more you’ve kept track of your payments, the better the score. Credit history typically accounts for about 15% of your total score.
Public records
Public records tracks whether or not you’ve ever had to file for bankruptcy or whether or not you’ve had a history of your debts being sent to collections. The more often this occurs, the more you will be considered a risk to lenders, and the lower your credit score will be. This accounts for about 10% of your total score.
Inquiries
The last 10% of your credit score goes to inquiries. This means that whenever your credit file is access, or there’s a request for information on your credit report, that information is considered as an ‘inquiry’. Why does this matter? Because many inquiries are due to a consumer looking for more credit. This request for more credit is considered as one of the signs of financial distress. Many inquiries could lead to your credit score being impacted.
How to get a good credit score
There are many ways in which you can secure yourself a good credit score. Due to the manner in which scores are calculated, the best way to ensure that yours doesn’t drop is to:
Pay your bills on time
Since your payment history is the most significant contributor to your credit score, it’s important that you keep track of all of your payments and ensure that you don’t fall behind. If you do find yourself falling behind on payments, contact your creditors as soon as you can in order to let them know when you’ll be able to pay them. They will sometimes even accept a payment agreement. As long as your creditors are kept aware of your situation, it shouldn’t pose too much of a problem.
Don’t use up too much of your credit
Since the second biggest contributor is the amount of credit you use versus the amount of available credit you have, you should try to keep your balances low. Keeping your balance low will not only ensure that your score won’t drop, but it will also ensure that you don’t pay too much in interest in the long run. A good rule of thumb is to only use up a maximum of 30% of your total available credit. If you find yourself unable to follow this rule, consider revisiting your budget or contacting a professional such as a licensed insolvency trustee.
Don’t apply for new credit
If you find yourself in a situation in which you’ll be unable to get by unless you apply for new credit, contact a professional. Living on credit not only means that you’re going to pay an exorbitant amount of interest on top of your principal, but it also means that you’re likely facing a lot of financial hardship. Before considering applying for new credit, see if you can budget your money differently or if you can get rid of all of your debts once and for all with a licensed insolvency trustee.
You don’t have to face your debts alone. An LIT will come up with the best solution to your personal situation. From consumer proposals, to debt consolidations, to budget reorganization, to personal bankruptcies, your LIT will ensure that you rid yourself of all of your financial burdens so that you can have a fresh start.
