SETTLE THE (CREDIT) SCORE
November 21st, 2017
By: Deborah Robertson
You’ve probably heard the term before, but do you really know what a credit score is? And more importantly, do you know the role your score plays in your overall financial well-being?
If not, you’ve come to the right place. Because knowing your score is a big deal. So is having a good or great score. After all, when it’s time to apply for a loan, mortgage, line of credit and other types of financial products, having a good score makes all the difference.
But let’s start at the beginning and answer the question: what is a credit score exactly? The analogy I always use is thinking of it as a retelling of your financial story, which credit unions and banks read up on to find out if they’ll let you borrow from them. Basically, it’s how these financial institutions determine what type of risk you represent.
Scores typically range anywhere from 300 to 850. The higher your score, the better it is for you and your chances of getting that line of credit, loan, mortgage or whatever you might be interested in applying for. So, how is your score determined? A bunch of factors influence it including your payment history, current level of debt, the types of credit you’re using, the duration of your credit history, and so on.
FICO, one of the biggest credit scoring services out there, bases your score on a host of factors, including your payment history, accounts owed, the length of your credit history, new credit and credit mix. Visit their site for more details on these factors and how you score.
The next question to shed some light on is: why is having a good score important? Well, aside from it determining whether you’ll be approved, the main reason is it can affect the interest rate that you’ll end up borrowing at. So, if you have a poor rating, you can wind up paying a higher interest rate on a loan. If you’ve got a better score, however, your rate can be lower. Remember, your score is how financial institutions gage the likelihood of you paying them back, or the risk they believe you represent. That’s why establishing a good credit history from the get-go is so crucial.
If you want to find out how you score, click your way to TransUnion®,Equifax® or Experian®. It only takes a few minutes, and it’ll give you a detailed account of where you stand when it’s time to get that mortgage or loan. You can also get some more details and resources here, including other sites you can access to find out how high (or low) your credit rates.
Finally, if you want to want to learn how you can build your own credit score, consider the following:
- Apply for a credit card with a small limit, and use it for everyday purchases such as gas and groceries. Readjust your budget so you can pay for those purchases every month in full.
- Pay your bills on time each month by setting up a reminder on your phone or in your calendar that highlights all your bills and the dates they’re due.
- Set up an automatic e-transfer for 3% of your credit card limit from your payroll account to the credit card five days before the payment date each month. This will ensure that your minimum payment is always on time.
- Try to make sure the credit card balance you carry forward is never more than 90% of your limit.
Did you know you can still build your credit score without having a credit card? Make an appointment with your financial advisor to set up an RRSP loan of $500 or greater each year. These loans are typically approved at a lower rate of interest, are paid in full at the end of each year, plus you can invest the $500 or greater into an investment of your choice! The interest you pay on the loan minus the interest you earn depending on how you invest your RRSP deposit is nominal. However, your good repayment of this annual loan allows you to build your credit rating even if you don’t want a credit card or qualify for one.