Everything you need to know about your credit score

In many ways, credit scores are the beating heart of the financial services system. It’s a three-digit number that represents your financial health.

In Canada, there are two credit bureaus – Equifax Canada and TransUnion Canada – that maintain these numbers for every Canadian.

Why your credit score is important

Your score is a primary factor used to determine your eligibility when you apply for a loan, mortgage, or other financial products. In addition to helping establish what financial products you qualify for, a high number can also help you get a lower interest rate.

Simply put, this number can help you qualify for some of the best credit cards in Canada, as well as get a cheaper car loan, a lower mortgage rate, and generally a lower cost of borrowing money.

As you can see, a good credit score is a very valuable thing to have.

How to read your credit score

A perfect credit score is 900, and the lowest possible is 300. The higher the number, the better off you are. However, within that 600-point range there are a number of generally accepted levels that indicate your financial health.

If you know what your number is, you can see where you stand:

800-900: You’re in excellent financial standing.

720-799: You’ve got very good credit.

650-719: Your financial health is considered to be good.

600-649: Here you’re in the fair zone. You might encounter challenges applying for some financial products.

300-599: Considered low, your score might need some attention when looking to apply for a loan as you rebuild your credit.

You can see your credit score for free by mailing a request to Equifax or TransUnion. They’ll provide a free report for you once per year, but it is worth noting that requesting additional reports can negatively impact your score. Alternatively, you can sign up for free services offered by fintech companies like Borrowell which monitor your credit and allow you to view your score whenever you’d like.

It’s also important to know the difference between a “hard inquiry” and a “soft inquiry” when it comes to your credit. A hard inquiry is typically associated with applying for a financial product such as a car loan or a mortgage, while a soft inquiry occurs when someone checks your rating for non-lending purposes such as opening a regular bank account. Hard inquiries can lower your score, while soft inquiries do not.

How to improve your credit score

Improving your number is like growing your savings account – it can take some time but with a bit of work, you’ll be on the right track. The good news is the habits that can help you maintain and improve your credit score are relatively easy to do:

• Pay your bills on time: while this doesn’t increase your score, late payments on bills can lower your number. Your bank can also report bounced cheques, so it’s best to keep good financial habits if you wish to keep your finances healthy.
  
  
• Stay below your limit: keeping your credit utilization (how much money you owe vs. your total available limit) at 35% or under is a great guideline to help you keep your finances in top shape. It shows you’re in control of your spending and responsible with payments.
  
  
• Keep applications to a minimum: Every lending application leads to a hard inquiry to see if you qualify. These hard inquiries can negatively impact your credit score, so limiting the number of them can help your number stay higher.
  
  
• Consider keeping old accounts: the age of your accounts (i.e. how long you’ve been borrowing money) counts for about 15% of your overall credit score. While this doesn’t mean you should keep high fee credit cards that you don’t use, it might be worthwhile holding on to an old credit card on which you’ve had a positive credit history.
  
  
• Be vigilant about errors: mistakes do happen in credit reports. You should get a full report at least once a year (or monitor it regularly with other tools) to scan for any errors or signs of identity theft.

If you have no credit score, or want to rebuild your credit, you can explore secured credit cards as a way to help you get in the range you want.

Bottom line

Having a good credit score is one major marker lenders use to assess your financial health. The better you rank, the better your access to affordable credit, which means being likely to qualify for the best rates for products such as mortgages, lines of credit, and auto loans, putting more money in your pocket to pay off loans sooner or achieve your goals faster.

Article submitted by Ratehub.ca

Ratehub.ca empowers Canadians to search smarter and save money by comparing mortgage rates, credit cards, high-interest savings accounts, chequing accounts, and insurance.