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Credit Scores 101: What You Should Know About Yours

Credit scores have a big impact on our lives. They affect our ability to get a loan for a car or mortgage and impact the interest that we’ll pay on those loans, which can make a huge financial difference. These scores are a little difficult to understand, but knowing a few simple tips can make a big difference when it comes to your credit.
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There are many different numbers you probably have memorized: your phone number, Social Insurance number, maybe even a credit card or bank account number. But there’s one number that you may not even know that has a significant impact on your life. Your credit score can impact your ability to buy a car, get a mortgage, or even rent an apartment. Lots of factors impact credit scores, and they can be hard to understand. Here are a few basics.

What is a credit score?

Your credit score is a three-digit number based on an analysis of your financial history. It’s a quick way for lenders or landlords to determine your track record with making payments on different financial obligations.

Credit scores range from 300 to 900, and the higher the number, the more likely you are to be granted a loan or issued a credit card. Higher numbers also mean that you will likely get a lower interest rate on anything you need to pay back. A credit score of 750 or higher is generally considered “good.”

The two main credit score bureaus in Canada are TransUnion and Equifax.

What impacts my credit score?

A few different factors play into calculating a credit score, and some of them are a bit counterintuitive.

  • Payment history: This reflects how often you make your payments on time. Late payments hurt your score, while making payments improves it.
  • Amount of debt: This number shows how much of your available credit you’re using. The lower the percentage, the better it is for your credit score.
  • Credit age: This is the average age of all your credit accounts. The older your credit age, the better, which is why you should avoid closing a credit account unless you have to, like if you’re paying off a loan.
  • Account mix: Lenders like it if you’ve successfully managed a wide range of credit products, like a credit card, a car loan, and a mortgage.
  • Number of hard inquiries: Hard inquiries occur when a company checks your credit, usually after you’ve applied for a loan or credit card. Soft inquiries, which occur when you check your credit, do not hurt your score, but hard inquiries do.
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What if I have bad credit?

It can be hard to raise a credit score, but it’s definitely not impossible. It can take time, though, so if buying a house or car is a goal for you, you probably want to start working to improve your score years before going to the bank to ask for a loan. To raise your credit, look at the above factors and see how you can improve each of them.

  • Try to always pay your bills on time. Unfortunately, missed or late payments continue to impact your credit even after you’ve resumed paying on time, so do your best to avoid paying late. If you’re worried about forgetting payments, try setting up auto-pay on your accounts to avoid missing one.
  • If you already have debt, pay it off as quickly as you can. A good tip is to start with the smallest account and pay it as quickly as you can. Then, once it’s paid off, apply the amount you were paying to the next-smallest account, plus some extra if you can.
  • If you’re able, open a credit card at a young age. Then, charge a small amount to it, and pay it off in full every month. This will help build your credit age and your payment history at once.
  • Try to limit hard inquiries by only applying for credit when you need it. It’s not something that should be done on a whim since it impacts your credit score every time you do it.

It can be nerve-wracking having one little number that can have such a major impact on your life, but with a little bit of know-how and money management, you can maintain a credit score of 800 or more that allows you the financial freedom to do the things you want.

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