You’ve probably heard the term credit score, and you probably know that it heavily influences whether or not you will be approved for a loan or mortgage. Do you know what goes into calculating your credit score? And do you know what the implications are if your credit score isn’t what it should be? Let’s look at how your credit score is calculated, why it might not be as high as you would like, and what you can do to improve it.
What is a credit score?
Your credit score is one of the most important numbers in your financial life and yet many Canadians don’t know what their credit score is! Your credit score is generally a number between 300-850, that comes with your credit report (a summary of your credit history). The higher your number, the better your chances of accessing credit and getting a favourable interest rate.
Your credit score can change often depending on your financial situation and behaviours, and usually update at least once per month. Your credit score can be affected by how long you’ve had credit, if you miss payments, how much debt you are carrying, and the number of recent credit applications you’ve had. A lower credit score may result in a risk premium that could increase your interest rate.
In Canada, there are two credit bureaus that collect and share information about your credit standing: TransUnion and Equifax. They send your credit report to financial institutions, credit card companies, cell phone companies, and other companies who are looking to do business with you. In most provinces, including Ontario, you need to give permission for a business or person to check your credit report.
How can I find out what’s on my credit report?
According to Canadian law, you are entitled to access your credit report online or by mail for free from either Equifax or TransUnion. This is called a Consumer Disclosure. This is not the same version that is supplied to businesses that are requesting your credit report. The version you receive will actually contain more information than is given to third parties.
If you find an error on your credit report, it can negatively impact your credit score. It can also be a sign of identity theft! Make sure to check your credit report at least once per year to see if there is anything to be concerned about. Look for mistakes in personal information, credit card or loan account information, or anything that isn’t familiar. Contact whichever credit bureau you are using if you suspect there might be an error on your credit report.
How can I improve my credit score?
If you aren’t happy with your credit score, there are a number of things you can do to increase it:
Make sure you pay your bills on time! Your payment history is the most important factor in your credit score. If you can pay your bills in full, that’s best, but ensure that you make the minimum payment at least. Most financial institutions offer the option to set up auto-pay. This is a great tool to guarantee that you’re paying your bills on time!
Start building credit history. Your score may be low because you haven’t built a credit history – begin by applying for a credit card.
Keep your credit utilization ratio low. Your credit utilization ratio is how much of your revolving credit (credit cards and lines of credit) that you are using compared to how much you have available. You can calculate your credit utilization ratio by adding up your balances on all of your revolving debt, and then dividing it by the sum of all your credit limits. Multiply that number by 100 to get a percentage. Ideally, your credit utilization ratio should be less than 35%.
Keeping an eye on your credit score can help you access credit when you need it, and even discover instances of identity theft. For more information on credit scores and lending, visit your nearest Kindred branch, or make an appointment with a member of our Personal Lending Team.