Why credit scores matter
How to gain more control over your financial future.
Many aspects of the economy are affected by forces well beyond our reach, but being attentive to the economic factors that you can influence directly, like spending, saving and investing, can give you greater control over your financial future. Knowing how to build and preserve a solid credit score can help expand your options down the road when it comes time to borrow funds.
What is a credit score?
Essentially, your credit score (also known as a credit rating) is a number between 300 and 900 that shows lenders how good you are at borrowing money and paying it back. Along with a credit report, it’s a key piece of information that they’ll look at whenever you apply for a loan, credit card, a line of credit or a mortgage. The higher the number, the more successfully it says you’ve managed your credit, debt and overall finances in the past – and the more likely you are to repay loans in the future. If your score registers near the higher end of the scale, you can enjoy advantages, such as access to better lending rates and more receptive responses to your applications. Lenders generally regard scores within the 660–900 range as good, very good or excellent.
What makes a good credit score?
In Canada, two credit bureaus are permitted to collect information on your financial activity: Equifax and TransUnion. Equifax and TransUnion each use the information to develop a credit report, or profile, that reflects your financial status and evaluates your risk.
Both bureaus make this report available to any lenders you have asked for credit, and you’re also entitled to see it for free once a year. The credit report forms the basis of your credit score. Here are some of the criteria that go into calculating your score:
Whether you carry a balance on your line of credit or credit cards
Whether you always pay your bills on time
Whether your current credit products are close to or exceeding their limits
How frequently you apply for more credit
Whether collection agencies have been notified of your debts
Whether you have unpaid taxes
Whether you have ever declared bankruptcy
Remember to check your credit score
A growing variety of online credit service sites, such as CreditKarma.ca or Borrowell.com, as well as many banks, offer access to your credit score for free. Generally speaking, as long as you don’t do anything too unusual in terms of credit activity, your score won’t change very much. However, it’s good practice to check it from time to time to know exactly where it stands, especially if you’re planning to apply for more credit in the future. It’s also a good idea to monitor your score in case of any errors that need to be corrected and to ensure it isn’t being affected by some element of fraud.
Directions on how to obtain your free credit report from Equifax and TransUnion can be found on the Government of Canada’s website.
Following these tips can help you preserve and improve your credit score:
1. Never miss a payment
Missing even a single credit or bill payment entirely can decrease your credit score. If you’re in danger of missing a payment, making a partial or minimum payment is necessary to preserve your credit score. If you anticipate difficulty making a mortgage or loan payments, contact your credit provider to learn more about other possible payment options and assistance.
2. Don't rely too much on credit
Developing an appetite for too much credit can impact your score, as can carrying an excessive balance. Ideally, you should pay off any credit balances in full each month to preserve your score and to avoid costly interest charges. If this is too challenging, consider setting up a pre-authorized monthly payment plan for some or all of your credit balances. Your advisor may also be able to suggest ways to consolidate your debt at a lower rate of interest if your balances have become too difficult to pay down.
3. Keep your oldest credit line or card active
Your credit history says a lot about how responsible you are with money, so try to keep your oldest credit card or line of credit active, even if you rarely use it. Keeping it open and in good standing is a strong indicator of your financial behaviour over time.
4. Try to use different types of credit
Using a variety of credit products can show lenders that you can handle multiple payments at once. Managing credit cards, a car loan and a student loan all at the same time may help boost your score. Ultimately, you want to demonstrate that you can pay back any money that you borrow.
5. Limit your new credit applications
Sending multiple credit applications can raise red flags for lenders, so limit how many times you apply to help steer your score away from taking a hit. If you're approaching multiple lenders for quotes, try to get to them within a short time. This way, the combined credit inquiries will appear as only a single request and reduce the damaging effect of too many inquiries.
Your credit score can be a powerful financial tool. Maintaining a strong score can ease the way forward to future funding that may help you achieve your goals. Speak with your advisor to learn more about what you can do to ensure your credit score stays in the good to excellent range.