Credit Score 101

Like chocolate, credit used wisely can be good in small doses.  Too much credit (like too much chocolate believe it or not) is not good.

What is a good credit score?

How is your credit score determined?

How to avoid bad credit?

Read on friends.

What is a good credit score?

According to the Financial Consumer Agency of Canada your credit score can range from 300 – 900.  Higher is better, lower is cause for concern.  This trusty site tells us a solid credit score is around 750 and anything higher is great to excellent as you approach the top end.

How is your credit score determined?

Your credit score is determined based on a number of weighted factors.  Here a rundown of those top factors.

  1. Payment history

Payment history reportedly makes up to 35% of your credit score.  Kill debt and don’t be late, you’re good.  Miss a payment or payments and your score will tank.  Declaring bankruptcy or having collection agencies come after you will kill your credit score.

  1. Debt load

Total debt owed accounts for up to 30% of your credit score.  The ratio of the amount of credit available against the amount of debt used will impact your credit score.  Keep your debt utilization low.

  1. Credit history

Although not as important as your payment history or debt utilization, the length of time you have used credit will impact your credit score, up to 15%.

  1. Recent inquiries

Apply for new credit in moderation.  Why?  Recent “hits” on your credit will impact your credit score; this factor accounts for up to 10% of your score.  There are however a couple of different types of credit checks you should know about.  “Hard hits” are those related to new credit applications, which will lower your score especially if you have many inquiries that occur within a short period of time.  “Soft hits” are those inquiries related to your existing credit, such as credit card limit increases.  Don’t worry too much about the “soft hits”, they don’t appear on your credit score and they don’t lower your credit score.

  1. Credit type

This makes up the last 10% of your credit score.   You can appreciate applying for a $300,000 mortgage will impact your credit score more than a request for credit card with a $5,000 limit.  Credit mix is a factor.

How to avoid bad credit?

Don’t have any credit in the first place but that’s not very realistic.  Having a credit history, an excellent credit history, is a benefit to you.  Here are my top tips to keep your credit score in check and keep your score at the top end over 750.

  • This shouldn’t come as a shock but pay your bills on time. Don’t be late.   Set automatic payments or reminders to help you out.
  • Pay your loans off, fast. The faster the debt is done, the better for your score and the more cash flow for you.  Win-win.
  • Keep your credit card balance ratio, low. Any credit card balance approaching 50% of the credit lending limit is risky for the lender, and you.
  • Keep a long credit history. Try to avoid cycling-through new credit cards every few months.
  • If you do wish to try new credit cards, consider cancelling the most recent ones in your wallet. Again, keep the credit with a longer track record.
  • Avoid debt consolidation. I know this happens but this can have a negative impact on your credit score.
  • Correct errors associated with your credit history. The longer errors persist the harder it might be to resolve bad credit.
  • If you have no credit history or need to rebuild your credit status, open a secured credit card account.

At the end of the day your credit score is the lending risk attached to you by lenders.  Bad credit can be damaging to your financial health.  Bad credit can affect your ability to ask for a loan, rent a car, apply for a job or even rent a place to live.  You want to avoid bad credit.  Following my tips above, like chocolate, credit used wisely and in moderation can be a good thing and my tips will improve your credit score.

Want to order your credit report history? 

Check out two of Canada’s leading credit bureau sites:

Equifax

TransUnion.

I’ve ordered by credit report, for free, a few times over the years.  You can too and here’s how.

Want your FREE credit score? 

Thanks to my friends at Borrowell, you can.  I got my score recently and so did my wife.  Get yours for free in minutes.

Disclosure:  No affiliation with Borrowell at this time.

11 Responses to "Credit Score 101"

      1. That’s interesting. We didn’t bother with my wife’s. We each only have 1 CDN cc (joint), and everything else joint so I’m sure we’re pretty close.

        I’m not sure how I could make mine higher without taking out loans, a mortgage and using more cards etc. Nothing I’m interested in! LOL

        Reply
      1. Slow and steady for 2017. Home purchase, increasing investments, setting aside a “fun fund” for some active trading. I have yet to get involved in dividend investing so that’s high on my radar. Happy Holidays.

        Reply
        1. Nothing wrong with slow and steady. It’s a get wealthy eventually game we’re playing after all. Get rich schemes also mean stay poor schemes.

          Best wishes and thanks for being a fan. Stay in touch.
          Mark

          Reply

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