What’s in a number?
Well, if that number is your Credit Score, quite a bit !
A credit score (also known as a Beacon or a FICO score) is a 3-digit number that is calculated by taking numerous pieces of personal and financial information and history into account. It is used by lenders, prospective employers and landlords to make decisions about the potential risks involved in lending money, hiring staff or renting out property.
Credit scores range from 300 to 900 with 680 typically being the minimum score that traditional lenders require before they are willing to lend funds to an individual. Although there are lenders that will lend with lower scores, they typically charge a premium rate for doing so, thus costing you more money in interest over the term of the loan or mortgage.
- Excellent (741-900)
- Good (690 – 740)
- Fair / Average (660 – 689)
- Below Average (575 – 659)
- Poor (300-574)
What kinds of information makes up your score?
- Payment History – 35%
- Credit Utilization – 30%
- Length of Credit History – 15%
- Soft and Hard Credit Checks – 10%
Diversity of Credit – 10%
How to improve and/or Maintain your Score?
As you can tell from the previous section, your payment history and credit utilization rank the highest by far when it comes to determining your credit score. Things to keep in mind…
- Pay your bills on time!!!!! Paying off the full balance each month is obviously preferable but not always manageable. Make sure at the very least you are paying the minimum payment required on or before the due date. Many credit card companies offer automatic payment setups from your bank account, I would highly recommend setting this up for at least your minimum payment. You can always make an extra payment should you find yourself with additional funds during the month.
- Try to keep your utilization low. While I would never recommend carrying multiple credit cards around as the temptation can be too much for some, your credit score is better served by having less than 50% of your authorized limit being utilized (30% and lower is optimal). Having one credit card with a $2000 limit which is fully utilized will have more of a negative impact on your score than having two credit cards with $1000 limit each and $500 owing on each.
- Review your credit history and correct any errors or omissions. Both Equifax and TransUnion offer you a free credit check annually where you can obtain a copy of your Credit Bureau to check for accuracy. It is amazing how frequently we pull reports on our clients where they find wrong or outdated information. Credit providers such as banks and credit card companies don’t always update their files with the credit bureau and having incorrect information can mean the difference between an approval and a decline, or a timely delay in obtaining that loan or mortgage you are seeking.
No Credit history?
Often, no credit history is just as limiting as a negative report. As Credit reports are used by employers to evaluate prospective employees and by landlords reviewing potential tenants, there is more at stake than just the ability to obtain credit.
Many credit card companies offer secured options where you place a deposit with them for a set period of time and they issue you a card based on that security. The same rules as above apply to build your credit rating, watch your utilization and make your payments on time! Some banks will offer secured loan options which may help you in building that credit as well. Be sure to check with your adviser about which method makes the most sense for you!
In summary…
While important to many facets of your life, a credit score is a number that can and does change over time. Don’t be frustrated if you haven’t gotten off to the best start or have hit a bump in your financial road, there are strategies and methods to improve your situation, talk to a trusted advisor to work on the best strategy to get you back on track!
Brenda St Amand is a licensed Mortgage Agent in Barrie, ON. Working with 11 others Agents and Brokers through Mortgage Sense Inc., she has access to over 30 different lenders and their product offerings. As a financial professional for over twenty five years, Brenda is known for always putting her clients first and being flexible and understanding of their needs.