Understanding & Improving Your Credit Score
If you are looking for ways to better your financial life, one of the first tasks you should be focusing on is how to improve your credit score. Your credit score is a measure of your demonstrated ability to meet your loan commitments and other bills in a timely manner. In Canada, it is derived from a credit report issued by either TransUnion or Equifax and ranges between 300 and 900. The Canadian average is around 650.
What is a good credit score?
Credit scores of 700+ are considered “good” and offer a higher chance of loan approval, greater borrowing limits, and lower interest rates and insurance premiums. If you want to get one of those super-low advertised mortgage rates you are going to need a top-notch credit score.
Potential interest savings are huge on big-ticket items; qualifying for a preferential rate on your mortgage could easily save you tens of thousands of dollars. Vehicle loans are another area where a good credit score can let you keep a lot more money in your jeans every month.
Who looks at my credit score?
Credit scores are used for a lot more these days than just whether you qualify for a loan. Insurance companies, potential employers, and landlords are just a few of the people that will often request your credit score and use it for decision making.
Understanding how to improve your credit score and building the highest score possible will open doors to many opportunities and save you money.
What affects my credit score?
1. Payment history (35%)
This is the largest determinant of your score and the most critical factor to manage. You need to always make the minimum payments and avoid anything ever getting to the “collections” stage – this includes parking tickets, mobile phone or other utility bills, student loans, and credit cards.
2. Credit utilization (30%)
If all your credit cards are maxed out, your credit utilization rate is 100% and it indicates to potential creditors that you are overextended. Carrying some credit card debt won’t lower your score (as long as you make the payments each month) but try to keep your balance under 30% of your credit limit at all times.
3. Length of credit history (15%)
It takes time to build your credit score, so get a credit card when you turn 18, use it, and pay it off in full each month. A car loan or student loan will also help greatly — but only if you stay current with the payments!
4. Credit mix (10%)
Using a mix of different types of credit will increase your score. When you are young the only credit available may be a credit card, but as you grow older adding a car loan, student loan, or line of credit to the mix will help improve your score.
5. Credit application frequency (10%)
Applying for a lot of new credit in a short timeframe will negatively affect your score. Potential lenders do what is called a “hard pull” on your credit history when you apply. You want to avoid having a number of hard credit pulls in succession as it may look like you are desperately seeking more credit.
How do I fix a bad credit score?
Credit scores are continuously evaluated and adjusted. If you have “errored” in the past, rest assured that the damage is not permanent! Your score can be raised/rebuilt over time by using credit responsibly, but it is much easier to avoid mistakes that lower your score in the first place.
Errors and omissions are not uncommon in credit reports, and it is a good idea to confirm the details of your report. Both TransUnion and Equifax have a process to report mistakes and getting them corrected.
Check your credit score regularly!
If you are looking for some simple financial advice that pays huge dividends — check your credit score on a regular basis! It will allow you to track improvements, detect errors, and prevent identity fraud.
Helping you improve your credit score often falls outside the scope of services for financial advisors, even though it is one of the most critical aspects of building wealth. Although it is something you are going to have to manage yourself, the reality is that it isn’t all that difficult.
From: Enriched Academy; January 2023
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