Why your credit score matters (and how to improve it)
Despite holding multiple credit products ( like credit cards or lines of credit) many Canadians don’t understand how debt and their behaviour around it affects their credit score in the eyes of the credit bureau — or why it’s important; on top of that, 47 per cent of Canadians don’t know where to check their credit score.
Your credit score is a threedigit number, between 300 and 900, that measures your creditworthiness. The higher your score the better, as it’s used by lenders and financial institutions to determine whether your credit- worthy or not. In general, a low score could mean you’re declined on a loan or receive a higher interest rate, while a higher score allows for lower interest rates and better options when it comes to things like getting a mortgage and borrowing money.
Your credit score number essentially indicates how likely your are to repay money you borrow, based on how you’ve handled past financial obligations.
How is your credit score determined?
Most lenders want to see two forms of active credit for at least two years. The longer the history reporting, the better.
Your credit score is made up of the following:
35 per cent payment history. It’s important to make your payments on time. Missing a $4 dollar payment on a credit card could be as bad a missing a $400 payment, so don’t skip the minimum payment. This also includes collections. Some creditors ( even city parking ticket collectors) may report that you haven’t paid them to your credit bureau, or even use a third-party collection agency to get their money back. These collections on your credit bureau can lower your score.
30 per cent utilization ratio. This is your level of indebtedness, or how much of your total available credit you’re using.
15 per cent length of credit. The longer you have an account open, the better. It shows you’re capable of managing credit responsibly.
10 per cent types of credit. It’s good to have a mix of different types of credit (revolving credit like credit cards and lines of credit are riskier than personal loans, so it’s better to have fewer of those in your mix) to show that you can handle your payments.
10 per cent inquiries. These happen every time you agree to a “hard credit check”. Hard checks usually happen even when opening a chequing account with a bank or a new phone plan.
Three things that can help improve your score: Practice good utilization ratio habits A relatively fast way to improve your credit score is to start practising good utilization ratio habits. Once you start doing this, it could improve in as little as 30- 60 days. If your credit card limit is $1,000 and your balance is $ 1,000, your utilization ratio is 100 per cent — and this not good in the eyes of the credit bureau. Credit bureaus base credit scores on behaviour with credit. If you’re constantly maxing out your credit cards, it could imply that you’re not far away from defaulting on your minimum payments. It looks like your income is stretched. Set an imaginary limit of 70 per cent and don’t go over that.
Doing this will keep your credit score healthy. For example, if your credit card limit is $10,000, don’t borrow over $7,000. Think twice about clos
ing an unused credit card It may seem like a good idea to close a credit card that you’re not using, or have paid off and are trying not to use. But, closing a card, or leaving it inactive, can negatively affect your credit score. This goes back to the length of credit factor that the credit bureau reports on, which makes up 15 per cent of your credit score. Rather than closing the card, consider using it for a monthly subscription like
Netflix or Spotify, and set up an automatic monthly payment from your bank account to ensure it’s covered. This trick will also improve your utilization ratio and payment history, since you’ll be staying far under your limit, and making on-time payments. Consolidate credit
card debt Credit cards are considered revolving debt, meaning when you pay them down you can keep borrowing against them. This type of debt is psychologically proven to keep people in debt. Many revolving credit products let you pay back only the interest, a major reason many people find themselves stuck in what feels like an endless cycle of debt. If you’re like 46 per cent of Canadians* and you carry a credit card balance each month, you could benefit from a personal instalment loan to help break the revolving debt cycle. Unlike credit card debt, an installment loan has a specific term and requires you to pay back interest and principal in every payment, which means you have a set deadline for paying it off and getting out of debt.
* http://globalnews.ca/news/1822207/nearly-half-ofcanadians-have- credit- carddebt-report- shows- hereshow-to-get-rid-of-it/ +Free credit score is provided by Equifax and is only available to MogoAccount holders that have passed identity verification. The Equifax credit score is based on Equifax’s proprietary model and may not be the same score used by third parties to assess your creditworthiness. The provision of this score to you is intended for your own educational use. Third parties will take into consideration other information in addition to a credit score when evaluating your creditworthiness. The first step in improving your credit score is knowing it. Mogo offers Canada’s only free credit score with free monthly monitoring. Check your score at mogo.ca
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