Credit Scores – What Are They and How Can I Get One?
Credit scores. You have no doubtedly heard this term before if you have ever applied for a credit card, rented an apartment, or applied for a mortgage or car loan. But what is a credit score and how much does it actually impact you? In its basic form, a credit score is a 3-digit number that represents your credit risk and lets potential lenders know how likely you are to be able to pay your bills on time.
While it is a simple concept, a credit score can have a huge impact on your financial decisions, from whether you can rent or buy a home to how much interest you will pay on your credit card. Read on if you are interested in finding out what a good credit score is, the impact it can have on your life, and how you can improve your own credit score.
What is a good credit score in Canada?
On a scale that ranges from 300 to 850, a credit score of 680 and up is generally considered to be a good score. A credit score of 790 and up is an excellent score. Most people have a credit score that ranges between 600 and 750. According to TransUnion, the average Canadian credit score is 650.
Having a good credit score will increase creditors’ confidence that you will be able to repay your debts, which will make it easier to get approved for higher lending rates. Creditors have the ability to define for themselves what they consider to be a ‘good’ credit score when evaluating borrowers for loans and credit cards, but most lenders choose to use one of the two commonly used credit scoring models in North America- FICO and VantageScore.
What Impacts a Credit Score ?
Since your credit score can affect your chances of getting approved for a loan, a credit card, and a rental application, you may be wondering what influences your credit score. There are five main factors that determine what your credit score will be, and those include:
- Your Payment History
Your credit history reveals information to credit scorers about your ability to repay the credit that you have already accumulated, such as credit cards, credit accounts with retail stores, lines of credit, installment loans, car loans, student loans, and mortgages.
One of the largest influencers of your credit score is your ability to pay off your credit on time. Failing to pay off your credit when due, having an overdue account sent to collections, and filing for bankruptcy can all have a large negative impact on your credit score. Credit scoring models usually consider how late your payments were, how much you owed, and how often you were late making a payment or missed a payment all together.
Your payment history accounts for approximately 35% if your credit score.
- Your Used Credit vs Your Available Credit
A key influencer of your credit score is how much of your available credit you use. It also looks at how much credit is available to you, as a higher credit limit is indicative of a higher credit score.
Your credit usage influences around 30% of your credit score.
- The Length of Your Credit History
This category takes into account how long you have had each line of credit for. A typical credit score calculation considers how long you have had your oldest account and how long ago you opened your most recent account.
Longer credit histories can help improve your credit score because they show creditors that you can reliably maintain a line of credit for a sustained period.
Your credit history usually accounts for 15% of your credit score.
- The Types of Accounts You Manage
There are two main types of credit accounts: installment accounts and revolving accounts. An installment account is a loan which you make fixed payments towards for a set period of time until a certain amount has been paid. A revolving account is used to repeatedly borrow money up to a set limit which will be repaid over time.
Your credit mix impacts 10% of your credit score, on average.
- Your Recent Activity
Credit scorers will look at your recent credit activity to determine if you’re recently applied for credit or opened a new account. They also look to see if you have ever filed for bankruptcy or had collections issues.
Your recent credit activity also accounts for approximately 10% of your credit score.
Things that Don’t Impact a Credit Score
Credit scorers only consider your financial history when determining your credit score, focusing on the credit you have borrowed and the payments you have made.
Credit scorers do NOT take into account:
- Your race, religion, sex, or gender
- Your age
- Your marital status
- Your occupation, salary, employer, or employment history
- The area in which you live
- Your debit card spending
- If you have ever been denied on a credit application
- Movement of money out of RRSPs.
- Soft inquiries (when you or a lender review your existing credit accounts)
Why Having a Good Credit Score is Important
Having a good credit score can benefit you in multiple ways. In general, a good credit score can help you achieve financial and personal goals. A good credit score can help you get approved for a mortgage or a car loan. It can also have a direct impact on the interest you will pay on a loan.
Your credit score can also impact your non-lending decisions. For example, most landlords require their renters to have a good credit score so they can have the added comfort of knowing that tenants will be able to pay their rent on time.
How to Check a Credit Score
Before worrying about how your credit score might impact your buying and borrowing decisions, it’s important to know what your credit score currently is. There are multiple ways you can check your current credit score but be careful that you are checking your credit score and not your credit report. credit reports are helpful and insightful, they usually don’t contain your current credit score.
To check your current credit score, talk to your banking institution. Some banks and credit unions will offer free credit score checks to their members, often through online banking software or mobile applications.
If your bank cannot help you, you can always buy your credit score from a trusted Canadian Credit Bureau. The two main credit bureaus here in Canada are Equifax and TransUnion, who will both provide you with your credit score for a fee. This can also be a convenient option for anyone who doesn’t live near a bank, since credit scores can be accessed online, in-person, and through the mail.
How to Improve Your Credit Score
Once you have determined what your credit score is, you may be interested in improving it. There are a few tried-and-true steps you can take to try to improve your credit score.
- Always pay your bills on time.
Making at least the minimum payment on your credit cards and other loans when or before they are due will help to improve your credit score, as missing even one payment can negatively impact your score.
This doesn’t just apply to your credit cards. Missing payments on your cell phone contract or line of credit can also negatively impact your credit score. If you are struggling to make payments or think your payment might be late, reach out to the lender as soon as possible. And never skip a payment, even if you are disputing a charge.
- Don’t spend your credit cards to the available credit limit.
Since your credit utilization rate plays a large role in determining your credit score, it’s crucial that you keep your credit card balances low. Most people who achieve an excellent credit score tend to have utilization rates in the single digits.
- Only apply for additional credit when absolutely necessary.
Applying for a credit card usually has a minimal impact on your credit score, but this isn’t always the case. Some account applications can lead to a hard inquiry, which can negatively impact your credit score. Even if the credit application has a minimal impact on your credit score, submitting multiple applications over a short period of time can lead to a large score drop.
The Importance of Monitoring Your Credit Score
By looking into your credit score before applying for new credit, you can better understand your chances of being approved with favorable terms. Checking your credit score well ahead of important buying decisions will provide you with the opportunity to improve your score and potentially save yourself money by obtaining more preferable terms. Overall, checking your credit score often and working towards improving your credit score can increase your odds of qualifying for a loan while improving your financial health.
Who Can Help Answer Your Credit Questions
Credit can be confusing and is unique for every person. If you have questions about your specific credit situation, consider reaching out to a Licensed Insolvency Trustee (LIT). They are licensed professionals who are trained to help you understand your credit situation and help you discover which options are available to you to find financial freedom.
If you are interested in speaking with an experienced LIT, take advantage of the free consultations offered by the experts at Blanchard & Co. Schedule yours today at www.repairdebt.ca.