If you’ve ever taken out a loan, tried to buy a car, or applied for a credit card, you’ve undoubtedly heard the words “Credit Score”. While it might seem pretty self explanatory, many of us don’t really understand exactly what it means, or how it’s calculated. On top of that, besides a very vague conceptual understanding of what it is, many people don’t know why it’s important to keep an eye on it. Here’s what you need to know.
What Is A Credit Score?
A credit score is a three-digit number that rates your creditworthiness. It is calculated from the information in your credit report, which is created when you borrow money or apply for credit. Lenders send information about your accounts with them to the credit bureaus (in Canada the main ones are Equifax and TransUnion), who then use a formula to calculate your credit score. This score shows how well you manage credit and how risky it is to lend you money. This number changes over time. It will go up if you use your credit responsibly, but it will go down if you are late making payments, skip payments, and otherwise have trouble managing your credit.
In Canada, credit scores run from 300 to 900, across five categories. The categories are poor, fair, good, very good and excellent. Your credit score is basically a snapshot of your financial health, and the higher it is, the easier it will be to get approved for loans and get better lending rates. In other words, your credit score lets lenders know how likely it is that you will repay your loan in a timely manner.
Ideally, you want your credit score to be at least 660, but of course the higher the number, the better. It’s important that you check your score every three months or so, and make sure you do everything you can to increase it as much as possible. Making loan and bill payments on time, and not maxing out all sources of credit, will usually give you a higher score. You can check your score for free online through several different companies, but they will be pulling the information from the same two sources mentioned above.
Why Does Your Credit History Matters?
Simply put, your credit history can affect your finances. Your credit history and credit score will help lenders decide if they will lend you money or not. It will also help them decide how much interest they will charge you on that borrowed money. If you have no credit history, or a poor one, you may not be able to get a loan, mortgage or credit card. It can also affect your ability to find a place to live, or get hired for a job. A good credit score will help you get lower interest rates, which will help you save money over time. It can also help you discover signs of identity theft, because you can easily see if anyone has applied for loans or credit cards in your name.
How Do Credit Cards Affect Your Credit Score?
Getting, using and paying off credit cards are the easiest way to build your credit. For people with no credit, or poor credit, it’s easier to get a credit card than it is to get a loan. By using it responsibly, it can help you build your credit score to a point where lenders are more likely to give you something more. Keep in mind however that credit cards can also lower your score if you use all your available credit. This makes you look like a risky borrower, and your credit score will drop because of it. Even if you have the intention of paying off a large purchase right away, your credit report may still show that you used all available credit at once. It’s best to keep your credit card balance below 30% of your limit.
Other things to keep in mind include:
- paying off your balance faster helps increase your score.
- every time you apply for a credit card, it’s noted and can lower your score.
- having too many credit cards can hurt you.
- the longer you have a credit card, the better it is for you.