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.
- 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.
- 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.
- 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%.
- 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.
- 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.
Proud affiliation with Borrowell.
About Borrowell – Did you know???
With Borrowell, you can get your credit score in Canada in less than 3 minutes??
Once you’ve signed up for Borrowell, you can download your Equifax credit report for free AND check your credit score at any time without hurting it. Plus, you’ll receive weekly updates on how your score has changed. (I get mine.)
Why Borrowell?
Your credit report is like your financial report card, and your credit score is like your final grade. In Canada, banks and lenders review your credit when you apply for financial products. Your credit report can also be pulled by car dealerships, insurers, cell phone companies, landlords, and future employers to determine your ability to manage debt and meet financial obligations. Because of this, it’s important to know your credit.
Stay on top of your credit health with Borrowell. Enjoy!
Always good to get a “fresh pair of eyes” for sure. Was just sharing something I’d found useful with other readers.
Appreciated Max. How is your investing journey coming along? Big plans for 2017?
Cheers,
Mark
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.
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
Free credit score checks at http://www.borrowell.com 🙂 Courtesy of frugal trader’s blog.
Thanks Max. Borrowell is linked a few personal finance sites – I figured it was time to write my own Credit Score 101 article. Cheers.
Thanks for that Mark.
You prompted me to check my score for the first time in my life. No surprise but all is good.
Well done 🙂 I was actually pleasantly surprised to see my score. My wife’s was higher!
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
Good info Mark!
Thanks my friend!