Earlier this year, I sought pre-approval for a mortgage only to find that I was not eligible for the lowest interest rates. I later found out the reason I was ineligible was because of my credit score. When I tell you, I was shocked! This made me check my credit rating for the first time; so I ordered my credit report (for free, nonetheless). I found that my credit rating was not excellent, or even good, but a “fair” rating…FAIR! I noticed there were some errors on the report, and that an unpaid phone bill had been sent to collections (I blame it on my study abroad year in my third year of university, when I literally had no cares in the world!). So this year, I embarked on a journey to fix my credit score and my credit rating has improved by almost 50 points, to a good rating! I hope you learn from my mistakes and find out all you need to know about credit scores:
What Is A Credit Score?
Put simply, a credit score is a used by lenders to evaluate your likelihood to pay your bills (on time), in order to protect the lenders from making risky loans.
In Canada, credit scores typically range between 300 and 850, with a “good” credit score being above 650.
There is a difference between a credit score and a credit report
The credit score is formed using information found in your credit report. There are three big credit bureaus: Experian , Equifax and TransUnion. All 3 of these bureaus create a credit report for you and your credit score is calculated based on information found in these reports.
What is in your credit report?
In your credit report, you will find information like your address history, as well as your history of dealing with credit. There is also information about the type of accounts you have opened and the amount of debt that you have in your name. Your credit score is not affected by personal information like your race, gender, religion, or marital status (so you have no excuse!)
Why Does My Credit Score Matter?
Your credit score is most important when applying for credit! For example, when obtaining a loan to buy a house, a car, or when applying for a credit card. However, there are other times when it matters too. For example, some employers look at your credit score to figure out if you are “responsible”.
Therefore, having a good credit score cannot be overemphasized. With a poor credit score, you might not be eligible for loans to buy a home or car, or you might be ineligible for the lowest interest rates available. Over the years, this could cost you thousands of dollars as you have to pay higher interest rates.
What Affects My Credit Score?
It is generally believed that your credit score is affected by 5 main factors (listed in order of importance).
35% – Payment history: Paying your bills on time
30% – Credit utilization: It is believed that using above 30% of the credit available to you reduces your credit rating, as you are seen as a bigger risk. The type of credit that most affect this category is your revolving credit (pretty much the amounts you owe on your credit cards). So if you have a $1,000 credit limit, keep your balance below $300 at any one point in time. If you feel like you need to use more than this amount, try to increase your credit limit (after considering other factors!)
15% – Average credit age: The longer you’ve been using credit the better for your credit report, as there is simply more information/ data to base your score on.
10% – Account mix: Having a mix of different types of credit accounts tends to improve your credit score. For example, having a mortgage, auto loans, as well as credit cards will likely improve your score.
10% – New credit: Applying for a bunch of new credit at the same time negatively affects your credit score; so try not to go overboard.
Learn more about credit cards here: Are Credit Cards A Good Idea
How Can I Improve My Credit Score?
So how can you improve your credit score especially if your credit score is in the gutter?A fail-proof way to do this is to focus on improving the 5 factors talked about above. Personally, I found the easiest changes I made to my financial habits that significantly improved my score were: paying all bills on time, utilizing less than 30% of available credit, and paying off any open collections (this happens when companies send unpaid bills to credit collectors to retrieve the payment from you). If you do this consistently, in about 3 to 6 months you should see your credit score improving.
How Can I Check My Credit Score?
You can check your credit score on any of the websites listed below. The websites below offer you one free credit report per year, and you will have to pay about $17 for subsequent reports.
To get a free credit report, you can use any of the following websites:
It is good practice to check your credit score and review your report at least once a year. This is not only to see if your score has increased or decreased, but also to see if there are any errors in your credit report that need to be rectified. In addition, it is important to do this to spot signs of identity theft.
If You Learnt Nothing Else:
Just know that your credit score is very important. You should try your best to improve it if it’s poor by seeking and using credit responsibly.
So tell me, what about credit score/ reports confuses you?