When it comes to your education, your grades are a great indicator of how well you study. When it comes to your health, fitness levels are a great indicator of how healthy you may be. And when it comes to your finances? Most banks, financial institutions, and lenders will look at your credit score.
What is my credit score?
A credit score or credit rating is a three-digit number between 300 to 900 that indicates how well you have managed your debt in the past. It is used to determine whether you are financially responsible. For lenders, your credit rating or credit score slots you as a credit risk or a trustworthy borrower. If you’ve had trouble repaying your debt in the past, it’s likely that you have a poor credit score. If you’ve made sure to pay your debts on time and have used credit instruments (such as credit cards) properly, then you likely have a good or even excellent credit score.
What is the range of credit scores?
Each credit score sits within a range from low to high. The lowest number is 300 while the highest may go up to 900. Depending on which slot in the range your credit score exists, it may be poor, average, good, very good, or excellent. Anywhere between 300-600 is poor. A credit score above 600 is fair. Have a score between 650 to 799? That’s great. Of course, a score between 800-900 is deemed to be excellent.
Why is your credit score important?
As we’ve said above, your credit score is used to determine whether you are financially responsible and a trustworthy borrower. It is important to have this indicator for creditors because they assume a degree of risk every time they lend you money. If you have a high credit score it means that you probably have a history of repaying your debts on time. They can then reasonably assume that you will repay them in a timely manner. It also indicates that you will not only make your payments on time but that you also won’t default on your debt and make off with their money without repayment.
In addition to determining risk, your credit score also helps determine the terms of your credit. How? Well, if you have a good credit score, then you can expect to pay lower interest rates, lower down payments for a mortgage, or find more wiggle room while negotiating loan periods, credit card fees, and any other penalties. Why? This is because as a borrower with a good credit score, more lenders would be willing to offer you a loan, mortgage, or credit card. You have the upper hand.
Unfortunately, the reverse is true if you have a poor or low credit score. Lenders then have the upper hand. With a low or poor credit score, you may be charged higher interest rates on your loan or mortgage. You may even have to make larger down payments when buying a house and suffer a number of inconveniences such as additional paperwork. This is because lenders assume a much higher level of risk when lending you money. Based on your credit history, they may find that your payments are often late, or that there is a greater chance of you defaulting on your debt.
Potential employers, landlords, and insurance providers may also access your credit score in order to determine if you’re a good and trustworthy candidate.
How is my credit score calculated?
Your credit score is calculated by a credit bureau. In Canada, the two main credit bureaus are Equifax and TransUnion. They collect, store, and share information about your credit history. They collect this information based on public records of your debt payment and any other details such as bankruptcy charges. There are several factors that affect your credit score. According to the Financial Consumer Agency of Canada, these factors include:
- how long you’ve had credit
- how long each debt has been in your report
- if you carry a balance on your credit cards
- if you regularly miss payments
- the amount of your outstanding debts
- being close to, at or above your credit limit
- the number of recent credit applications
- the type of credit you’re using
- if your debts have been sent to a collection agency
- any record of insolvency or bankruptcy
So, it may be that you’ve got a solid job, regular income, usually pay back your debts, and are a morally good person and upstanding citizen…who just forgot to pay their credit card bills a couple of times, and boom. There goes your credit score.
Unfortunately, we don’t really know how credit bureaus and lenders actually calculate your credit score. The formulas they use are not disclosed publicly. Since we don’t know the exact formula the credit bureaus use, you cannot calculate your credit score yourself. You need to request your credit report from these bureaus. This brings us to the next question…
How do I look up my credit score?
Considering just how critical your credit score is, it may seem logical to think that you would be able to access your credit score fairly easily, right? Wrong. You see, your credit score can be found on your credit report. And to get your credit report, you actually need to order a copy from either TransUnion Canada or Equifax Canada. The silver lining? You can get your credit report for free and it won’t have any effect on your credit score. Let’s explore some of the ways you can access your credit report and information about your credit score.
To get your credit report, you could submit a written request to TransUnion or Equifax. Request a copy of your credit report be sent to you by Equifax Canada via mail or fax. Alternatively, you can request a copy of your credit report be mailed or faxed to you by TransUnion Canada. When doing so, you should make sure you have copies of at least two separate identifying documents.
You can even choose to have your credit report information shared with you via mail by ordering it over the telephone. You would have to provide some information and prove your identity. Here are the numbers provided by the Financial Consumer Agency of Canada:
- Equifax Canada
Tel: 1-800-465-7166
- TransUnion Canada
Tel: 1-800-663-9980 (except Quebec)
Tel: 1-877-713-3393 (Quebec residents)
While these may seem tedious since you have to wait for your credit report to arrive via mail, there is one easier and quicker way to get your credit report. You can also choose to get your credit report online via TransUnion. The only drawbacks? You would have to pay a fee and can only request your credit report online once a month.
Okay, so you now know your credit score and found it could be better. How do you improve your credit score? With these five simple tips!
Tips to improve your credit score
Tip #1: Treat your existing debt with care
You already know how you manage your credit affects your credit score. So, make sure you have an account of all the debt you have, when payments are due, and anything else you need to keep in mind to avoid late payments or debt defaults. Setting yourself up for credit score improvement success starts with some mandatory organizing.
Tip #2: Always pay your bills and dues on time
Set up a reminder schedule, automate bill payments, create calendar events — do whatever you need to do to ensure your loan payments, mortgage payments, credit card payments, and any other dues towards your debts are paid by or before the due date.
Tip #3: Diversify your credit to improve your score
Sure, you’ve heard about diversifying your investments, but did you know it’s a good rule of thumb to do that with your credit if you want to improve your credit score? You can improve your credit score by using different types of credit instruments like credit cards, lines of credit, and different types of loans. Just make sure you’re paying those bills on time!
Tip #4: Don’t apply for different debt all at once
Applying for loans and credit cards automatically means that the lenders will request to check your credit score. If there are too many checks on your credit score, it may indicate that you are in desperate need of funds, which gives the lenders an upper hand.
Tip #5: Keep your new credit in line and your old credit accounts alive
This is not a quick fix but can be quite impactful. One way to improve your credit score is to keep an old credit account (such as a credit card) active for a considerable period of time. By using that account responsibly over a long period of time you can prove you are a responsible borrower. In the same way, when you get new lines of credit, make sure to use them responsibly. Little by little you will find your credit score improving.
We hope you find all the information about your credit score and tips to improve your credit score helpful. Make sure that you’re frequently monitoring your credit score and checking for any mistakes in your credit reports. A good way to do that is to keep alternating between credit report orders from each of the Canadian credit bureaus with a six-month gap between each order. We wish you the very best on your quest to improve your credit score.