At first glance, your credit score is simply a three-digit number. But that three-digit score on your report determines how likely you are to pay back your loans.
There’s a lot of mystery surrounding credit bureaus and how your credit score is calculated. Let’s look at four well-known credit score beliefs and debunk the myths surrounding them.
CREDIT SCORE MYTH #1: Checking your score makes it go down
Reality: It depends on who’s doing the checking.
When a potential lender pulls your credit report from the credit bureau it’s called a “hard inquiry.” Too many hard inquiries can negatively affect your score. For example, applying for multiple credit cards or loans simultaneously could drop your score quickly and dramatically.
But if you personally look at your own credit report it’s called a “soft inquiry.” Soft inquiries will not damage your credit score, despite what you may have been told. In fact, there are a number of apps (like Borrowell or Credit Karma) that allow you to check your credit score repeatedly without worry.
CREDIT SCORE MYTH #2: Credit reports aren’t accurate
Reality: Both Canadian credit bureaus—Equifax and TransUnion—use unique calculations (algorithms) to decide someone’s credit score. Because not all credit bureaus calculate your score in the same way, there may be a slight variation depending on where you’re getting your information from. The score may not be the same across the board, but that doesn’t mean it’s not accurate.
At its most basic, a credit score is simply a number —typically between 300 and 900— that is produced using these algorithms to calculate a borrower’s riskiness. Credit bureaus assemble this data from all sorts of sources, including collection agencies, retailers, or government records.
Your credit score is not just based on how you use your credit cards but on how long you’ve had credit, and if you’ve ever missed a monthly payment. Your score also considers if you have other types of debt (such as a car loan or a line of credit) and if you have too much credit available to use. All that information is then combined to come up with the three-digit number you see when you check your score online.
CREDIT SCORE MYTH #3: There is no way to grow your score without adding new debt
Reality: You don’t need to keep adding new debt to improve your credit score. In fact, by simply keeping your credit use low, paying off any delinquent accounts, and limiting the number of “hard” inquiries on your report, you can improve your score over time.
Paying down your credit card, overdraft, or loan as quickly as possible and not letting the amount of credit you use rise above 25% of the total available to use will also help. This is called your Utilization Ratio, and it’s one of the factors that has a high impact on how your credit score is calculated by a credit bureau.
Another great way to prevent your credit score from sinking even lower is to make sure you’re paying your bills on time, even if it’s just the minimum payment.
CREDIT SCORE MYTH #4: Filing a Consumer Proposal will damage your score
Reality: The number one concern a client has when considering a Consumer Proposal is what it will do to their credit score.
Filing a Consumer Proposal to resolve your debts can help you become debt-free anywhere from one to five years. It will also reduce your debt by up to 80%, offering you a manageable monthly payment plan, at 0% interest, for the remaining debt.
Yes, filing a Consumer Proposal will temporarily lower your credit score, but overall you’ll be in better financial health. A Consumer Proposal will remain on your credit report for a maximum of five years from the date you file. After that, you have a clean slate.
It may seem like a long time, but remember, as you’re paying off your Consumer Proposal you will also be working hard to rebuild your credit score. In that time, you won’t be applying for new loans or credit cards anyway, which is the main reason for maintaining a high score in the first place.
It’s important to understand your current financial situation. While protecting your current credit score may seem like it should be a priority, struggling to manage growing debt payments will ultimately have a greater negative impact.
Farber Debt Solutions has helped over 100,000 Canadians who needed guidance on their financial journey. Our team is happy to partner with you in taking the necessary steps to address your debt problems and rebuild your credit and financial health. Do you want to learn more about the benefits of a Consumer Proposal? Contact us today for a free consultation, we’re ready to listen.