How Your Credit Works and How to Make It Work For You!
“What is a credit score? Do I have one? How can I make it better?” All valid questions when it comes to asking a lender for a loan. It’s a three number grade that let’s lenders and financial institutions decide whether or not to permit you to borrow large amounts of money and what interest rates to charge you with. We’ve got some hints and tricks to learning your score, making it better, and getting it to work in your favour–we’ll also go over how credit bureaus compute those three defining numbers. You can be denied more than just a loan with a bad credit score, so we’ll go over that too!
Looking Up and Understanding Your Score
There are two credit bureaus in Canada: Equifax Canada and TransUnion Canada. You can request your credit score via post with proven identification and basic information–which takes 2-3 weeks. You can also request it online as well, if you need it sooner than that. Both will have a fee below $20.00 and both will provide you with a slightly different number as their calculating algorithms are different.
The credit scale seems like arbitrary numbers but they represent the level of trust and dependability you display when it comes to borrowing money and paying it back. 300-900 is the spread. The 300 being a very bad credit score and 900 being a perfect score, it’s still not black and white. There are grades throughout the spread that lenders will take into account.
Anything below 580 is considered a high risk loan. Conventional lenders will almost certainly decline the loan. Lenders that specialized in Bad Credit financing can still approved loans with this score but the rates will be high.
580-619 is also considered a higher risk loan but conventional lenders may approve at higher rates. Usually companies that specialize in Bad Credit Financing are your best option for financing is your credit score is below 619.
620-679 is the average loan bracket. Average or slightly higher interest rates with better approval ratings than that of the lower bracket.
680-719 puts you in a ‘low risk’ and ‘good credit’ zone and will give you little trouble attaining a loan with decent interest rates.
720-779 is the very good credit bracket. Your near perfect credit is well established enough for some of the lowest rates on the market as well as a higher lending capacity.
780+ is considered a perfect credit score! You don’t even need to get all the way up to 900 when in this bracket. Generally always approved for any loan with the best rates that lenders can provide.
Keeping it Up!
Understanding how your credit score works is pretty straight forward but any amount of negative information can rest on your report for at least 7 years. Let’s go over a few ways to improve your current standings or keep you rock solid at the top of the charts. In this short segment we’ll cover a few things you can do to improve your score.
Punctual Bill Payments
The number one way to improve your credit score is to pay your bills on time. It’s also the number one way people take hits to their current score. If you set it up the same day of every month to pay certain bills via auto-withdrawals, you won’t miss the deadline. Set the dates for payment a few days before they are due. That way you ensure there is enough time for the payments to get processed.
Lower Your Credit Usage
Another great way to improve your score is to use less than your limit and to stay there consistently. Start by paying off your bill and not using it. Proving you need less credit is a great way to show how much credit you can handle–kind of a paradox. Widdle it down to less than 30% and try to keep it there. It can be tough, but if you stick it out you can see rebounds as high as 80 points in a month! (which is pretty huge!)
Updating Old Information and Correcting Misinformation.
There is an annual free credit report application. Use this to your advantage! Set straight any errors you may have made along the way, or at least put yourself on the right path to doing so. It’s a great way to find any negative and false information that shouldn’t be on your report, as well. You can find open lines of credit that shouldn’t be there,(fraud) or even post-dated debts. Anything that older than 7 years shouldn’t be there. Perfect chance to give yourself a boost in correcting your score.
Stick To Credit Inquiries Once a Year.
There are two kinds of credit report inquiries. There are ‘soft credit checks’ and there are ‘hard credit checks.’ A soft check is something that a potential employer or landlord would look into. These won’t affect your score. A hard check is something you perform when you are trying to increase your credit limit or apply for a loan. These will always affect your score. It’s due to a financial phenomenon known as a “credit churn.” Applicants take advantage of rewards programs and cash back promotions from signing up to new cards and then cancelling them a few months down the road when the promotions or bonus periods end. This is immensely detrimental to your credit score as you can lose 10+ points for every card that you apply for. Another thing to consider as well is a 14 day window for inquiries. Many lenders will just consider this the shopping period for finding the best loan you can. Provided you find on within the window.
How is My Score Calculated?
Great question! There are a few ingredients that credit bureaus factor in when computing your overall score. Each one is slightly different, but they both follow the same main 6 components to the equation :
1. Payment History: Like we said about paying your bills on time, the same stands for paying your debts on time, too! Lender’s will always look at how and when you paid back your loans and consumer credit. Your payment history will take into account all consumer debt except for your mortgage. This will include any liens against you, bankruptcies and deferred payments. The more recent histories have a greater impact on their calculations than older ones.
2. Credit Utilization(amount owed): We discussed this one briefly. If you have been using less than 30% of your allotted credit amount you are in a good space. Keep it low but used. Proves you know how to maintain healthy levels of debt. Lenders like that.
Credit History: A great facet to looking good to credit bureaus would be to have had healthy credit for a long time. Keep a good track record of the 30% rule of thumb and you’ll be getting a better score.
3.Public Records: Kind of like your payment history, but it’s more focused on the larger infractions like past bankruptcies, and collections issues.
4.Credit Diversity: Showing lenders that you can manage different types of credit is highly adorned. Having a credit card, a loan and a mortgage is a heavy load, but if you can prove that you are handling it you are practically showing off at this point.
5.Inquiries: The more hard checks you have on your credit report, the more you get dinged. There’s no need to go applying for multiple credit cards all at once. Lenders and creditors who see numerous applications for credit cards in a short amount of time look at the scenario and deem you to have financial difficulties.
Another speculated factor (though not an official one yet) is your TPR or Total Payment Ratio. Credit bureaus have started to look at the amount you pay towards your credit card and how often you pay it. Neither bureau has reported actually calculating TPR into your credit score but that is subject to change in the future.