You likely hear the term “credit score” being thrown around a lot. But if you’re like most Canadians, you’re likely a little confused as to what exactly that means. You may know it’s a number and that it has to do with your credit history. But, other than that, you probably doubt if it actually has any impact on your life.
Credit card use in Canada has soared. More people than ever are applying for personal loans and are taking on heavier financial risks. So, credit scores are now being looked at more than ever.
So, don’t you think it’s time you learned exactly what credit scores are and why they’re so important?
What Exactly Is A Credit Score?
Simply put, a credit score is a three-digit number, ranging from 300 to 900. This number sums up your credit history and determines your ability to repay a loan. Ideally, you want your score to be at least 650 if you are applying for any type of loan.
How Is It Calculated?
Your score is calculated using a variety of information. While part of this score is based on how much debt you currently carry, it also takes your past into consideration.
If you have promptly paid at least the monthly minimum balance on all your credit cards and other loans, this will be reflected positively on your credit score. Having frequent missed or late payments, and delinquent balances sent to collections, will significantly lower your credit score.
Your balance-to-limit ratio
Sitting at the high end of your credit limit(s) month after month is damaging to your score. So, if you have $1000 as a credit card limit, try your best to keep the balance of your account at $500 or lower.
Applying for a lot of credit
Applying for every credit card you see is a dangerous move! Each time you apply for credit, it gets noted on your credit report and, therefore, lowers your score. Besides, having a lot of credit cards and credit lines in use at one time makes lenders very wary.
Length of accounts
If you have used, and regularly paid off, your credit card for several years this earns you major points on your credit score. So, try not to close any older accounts, this history is important.
Variety of credit
Having one credit card you routinely pay off is good for your credit score. But, having a history of different personal loans, such as a car loan or line of credit you paid off on time is much better.
How Can I Find Out My Credit Score?
You can obtain your credit score in Canada from two sources: Equifax and TransUnion. Both companies allow and encourage you to see your credit scores once a year for free.
Taking advantage of the free yearly credit check from both companies is a great idea. Not only will you know exactly what your score is so you can work on boosting it up if you need to, you also have the opportunity to check for any potential mistakes on your report. Yes, errors can occasionally happen, and your credit score could suffer because of this.
How Can Having A Low Credit Score Affect Me?
You may think having a low credit score isn’t a big deal. However, you will very likely run into a situation where it will affect you. Let’s take a look at just a few situations where your credit score will be looked at:
Applying for a personal loan
Your credit score is the first thing lenders look at to determine if you will be granted a personal loan or not. It also determines how much of a loan you can get, as well as what your interest rate will be. You are perceived to be a higher risk if you have a low credit score. So, while you can potentially still apply for a loan with bad credit, you likely won’t receive as much as you applied for and it could come with a much higher interest rate. Obtaining a secured credit card may be an option for you, but these come with a variety of restrictions.
Applying for a car loan
You’ve seen dealerships advertise those fantastic payment plans on their cars. What they don’t mention is that these deals are only available to customers who have a high credit score.
As with a personal loan, you may still be able to acquire a car loan if you have bad credit, but you may not qualify for nearly as much as you hoped. And, you can forget about getting that low advertised interest rate; yours will most definitely be higher.
Renting a vehicle
Yes, your credit score is even important when renting a car. The rental company is trusting you with their valuable property, and they want to make certain you are not a risk. Depending on your credit score, they could deny you, or you may be required to pay a deposit or surcharge before they hand over the keys.
Applying for a rental property
Landlords are also looking to protect their property. They want to find a tenant who is responsible; someone who will pay the rent on time. It’s possible that in a tight rental market someone who has even a slightly better credit score than you may get preference.
Many larger rental companies will require a credit score check, and it’s now becoming increasingly more popular with private rentals as well.
Applying for a job
Some employers have now started requesting access to your credit score when you apply for a job. Same as with landlords, they want to protect their business and assets and want to make sure their employees are responsible.
As you can see, it’s extremely important to keep your credit score as healthy as possible. At LendingArch we can assist you with your financial decisions and help get you on your way to a better credit score.