Your credit score may be the most important number to be aware of in your financial life. Yet, studies show that more than half of Canadians are completely unaware of where their credit stands and how credit scores work.
Your credit score holds a lot of power when you're looking to borrow money for a major purchase, such as a new house, or for that fancy car you've always wanted. A good credit score can mean the difference between your loan being approved or denied. Each negative incident, such as a call from a collection agency over a missed bill payment, is filed away and noted.
What Counts as a Good Credit Score?
A credit score consists of a three-digit number that is calculated using the information found in your credit report. It is used by lenders to determine your financial health, as well as assess your risk. Two of Canada's largest credit bureaus are Equifax and TransUnion, who use scores that range from 300 to 900. A good score is typically 670 and higher. If your credit score is more than 750, consider yourself as having an excellent rating. Keep in mind, the higher your credit score is, the less risk you are for lenders.
Factors That Impact Your Credit Score
The good news is that even if your current score is low, your situation doesn't have to be permanent. You aren't doomed to a life of poor credit forever if you commit to stay on top of your finances. There are several factors that go into generating a credit score and ways to reduce your risk of building bad credit:
- The amount of times you apply for credit. Simply put, reduce the number of credit applications you make. How often are you applying for loans? If you're applying for too many credit cards or loans within a 12-month period, this can negatively impact your scores.
- Credit limit. Be diligent in staying within your credit limit. You should aim to keep your credit utilization below 35 per cent of your available credit.
- Payment history. How often do you pay your bills? Neglecting to pay can be a huge red flag for lenders. Let's not forget the importance of paying your bills in full, as well. If you're really stuck, aim to pay the minimum payment at the very least.
- Length of credit history. Your credit score takes into account how long you've been using credit. Start building a positive credit history by taking out a credit card at a young age, and paying your balance in full and on time. Often, having no credit is worse than bad credit, so establishing yourself early on is wise.
You may be reluctant to review your credit report because you think doing so will negatively impact your credit score. It's important to know that soft hits, such as requesting a free copy of your credit report, do not affect your credit score. Equifax and Transunion both offer easy credit reports. Simply go online and enter your personal information. To receive a printable report both services charge a small fee but if you're willing to wait, you can receive a free report through the mail.
Lastly, don't hesitate to work with your trusted financial advisor on strategies to help rebuild your credit score.
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