Everything you Need to Know About Credit

HomeHappy • February 8, 2021

Your Credit Score is more Important Than Ever

Your credit score is an evaluation of your risk level as a borrower. In Canada, it’s a number between 300-900 that’s calculated based on the data in your credit report. Designed to give lenders insight into your capacity to manage your finances and repay a loan, your credit score determines what rates, terms, and products lenders will offer. 

If you’re interested in a mortgage loan, having good credit is vital to getting a great deal.

Your score is generated by 2 main organizations: Equifax and TransUnion, and both credit bureaus allow you free access to your data. Since your credit score can impact your ability to make big purchases, don’t get taken by surprise. The more you know about your financial standing before making a big decision like buying a house, the more prepared you’ll be. 

See where you stand, ensure correct information, that there are no errors, or strange activity by ordering your credit report and score. While there are more details available, essentially you need to prove your identity with two pieces of ID and basic background information. Your detailed report will arrive by mail in two to three weeks. You can also pay for instant online access for around $24.

Follow these links for instructions on accessing your free credit report from TransUnion and Equifax. 

Credit Report and Credit Score -- Are They The Same?

Your credit report contains both personal identifying information like name and address, and contains all your financial information. It details your credit history, including repayment, types of credit, and may also include public records that might affect your creditworthiness -- like bankruptcy, judgements, and liens. Lenders use it to verify who you are, see your activity, and learn about your repayment history.

Your credit score is a number calculated using the information found in your report. It determines your risk level as a borrower. The higher the number, the better the odds are that you’ll repay your debt.

Credit Score Range

In Canada, our credit range varies from 300 to 900. Your credit score is a lot like a really basic game -- you get points when you use your credit responsibly, and lose points when you struggle to manage it. Like most games, the higher your score, the better.

For example, someone with very good (725-759) or excellent (760-900) credit has a high probability of being accepted for a mortgage because it’s unlikely they will default on payments. 

People with higher scores have proven they’re reliable and trustworthy borrowers and generally get better credit terms. That translates to lower payments, lower interest rates, and they pay less interest over the lifetime of their account. They’ve also built enough credibility to borrow larger amounts. 

People with a credit score below 650 may struggle to get new credit, so it’s best to strive for 680 or more to remain in good standing. Good habits create better outcomes, and make it easier to stay financially fit.

If you're far from this number, don’t fret -- everyone’s financial and credit situation is different, and lenders have different criteria to assess potential borrowers. No matter your situation, we can help. 

Besides, a bad score isn’t permanent. Your credit score is flexible and always changing. It’s like a game, remember? So change your strategy. 

Follow our tips below to set yourself up for a mortgage that suits you. 

Be Consistent, and Improve Your Credit Score

Here are 7 easy ways to get you back on track, and build great credit.

  1. Create a realistic budget that works for you, and incorporates your debt. Include some fun money so you are more likely to stick to your plan.
  2. Pay your bills on time. If this is a struggle, set payment reminders or schedule automatic payments so the money automatically goes where it needs to. Late payments lower your score, and timely payment is huge when determining your credit score.
  3. If possible, pay off your credit card by the monthly due date. If you can’t pay in full, always pay the minimum amount shown on your statement.
  4. Never exceed your credit card limits. Use your card responsibly, and keep your balance well below the limit by spreading your spending. The higher your balance, the more impact it has on your credit score.
  5. Don’t apply for too much credit at once. The more applications you make, the more a lender checks your credit report. Hard inquiries stack and damage your score. Plus, the credit bureaus can see multiple applications as a sign of financial trouble.
  6. Don’t close unused credit cards. While cancelling a card seems like a great way to prevent yourself from debt you can’t afford, a healthy credit score requires a long history of responsible usage. When you cancel a card, you wipe the history. Besides, a low interest card with a zero balance and only periodic usage can really help build credit.
  7. Regularly check your credit report for any errors, and see how you’re doing.

There’s no shortcuts in the game of life, and it can take 3-6 months for the changes you make to reflect in your score. It takes time, patience, and consistency to rebuild credit.

Start now, and let your future self reap the benefits. You’ll thank yourself later. 

What is Good Credit? 

Well, it means your credit score is 650+, you can borrow and pay back on time, you’re trusted with large sums of money, and you have financial freedom to make bigger purchases.

Why it Matters

Having a high score provides you with better opportunities and more choices. 

Good credit is a major deciding factor on whether you’re approved for a new credit product, and sets the terms and rates. A great score saves you money. Period. 

Not only through making better financial choices for yourself, but because you do so, lenders want your business and are typically willing to give you a better deal too.

A good credit score shows lenders you’re reliable and trustworthy. It proves to lenders that you’re a great candidate for a loan or line of credit. 

Ultimately, it means you're creditworthy.

How is Your Credit Score Calculated? 

There are 5 financial factors pulled from your credit history that determine your score. Each element plays a significant role, though they are weighted differently which changes how they influence your score. Let’s deep dive into the specifics.

Payment History (35%)
Your payment history is 35% of your credit score -- the largest contributing factor. Lenders want to know they will get the money back that you borrowed. When you pay your bills, whether or not you’re on time matters. Your creditors report how much you owe, your monthly payment, and when you pay. A negative credit past will do some damage, and if you have a positive, clean history, it’s likely you have a great credit score to reflect that. The longer you have credit reporting to the credit bureau without late payments, the higher your score climbs. 

Debt Owed (30%)
Your credit utilization, and how reliant you are on non-cash funds plays a major role in calculating your credit score. Your current financial obligations determine if you can manage more debt. People with a lot of debt have lower scores. Owing debt also means racking up interest charges, so paying off debt both increases your score, and saves you money. 

Pro tip: A great credit score involves keeping the balance on your cards below 30% of the limit. It’s better to spend your spending over several cards, than have one card nearly maxed.

Credit Account History (15%)
How long you’ve been a borrower matters because it can provide a more accurate view of how you operate. It means you’ve had time to establish your reliability and trustworthiness. Someone who’s used credit over a long period of time is seen as a less risky prospect than someone just starting out. That’s why it’s never too early to start building your credit, and it’s a good idea to keep old accounts open. Even with a zero balance, and minimal usage, an old account is great for your overall credit health.

New Credit (15%)
Whenever you apply for a new loan or credit product, a lender does a hard inquiry into your credit report which drops your credit score for several months. Unfortunately, this effect stacks. If you apply to too many new credit cards or loans all at once, your score could significantly drop. Multiple credit applications can signal financial trouble, and red flag you as a risky borrower.

Types of Credit (10%)
Your credit mix plays a small role, and looks at how many cards, loans, or lines of credit you have. Diversity matters, and having a different mix of credit can help build your score. Certain credit types are more beneficial for you. For example, a credit card from a major, traditional financial institution is way better than a store credit card.

Your Choices Matter, Spend Smart.

Bad spending habits, and swiping without a care can have you quickly drowning in debt. Every transaction counts, no matter how small the purchase seems. Little things can sneak up on us, and they stack fast.

Sometimes we forget a credit card isn’t free money. Then we make irresponsible choices because it’s easy not to consider the consequences. Especially in the moment.

When you signed the dotted line and accepted your credit, you agreed to pay your lender back, and on time. That’s why missing payments damages your credit score -- you aren’t keeping your word. 

Be smart with credit. Maybe you don’t see it right now, but every choice you make affects you. It hits harder than expected if you haven’t been paying attention.

Order your credit report to see where you stand. Ensure there are no errors. 

If you’re ignoring your debt or not monitoring spending, it’s time to make changes. Make a debt repayment plan. Pay off as much as you can. If necessary, talk to us about consolidating. Credit Counselling and debt management programs can make buying your own home near impossible, so it’s better to talk to someone who has your long term interests at heart. 

Make a realistic budget and know what you can spend. Set yourself up for success, with a plan that suits your needs. Give yourself the freedom of security and financial peace of mind.

Protect What You’ve Built

If you’re worried about the health of your credit beyond our tips to improve and manage it, you may want to consider a credit monitoring service. Both Equifax and TransUnion offer that option so you can stay on top of your credit and spot any fraudulent accounts and charges.

Talk to us about any concerns you have, or if you have any questions. We’re always happy to offer customized solutions and advice that suit your unique needs.

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