What You Need To Know About Your Credit Score
You’ve probably heard of a credit score and you might know that it’s an important piece of financial information. However, do you know what your credit score is? And, if you do, do you know how it’s calculated?
However, your credit score is important. Financial institutions and other lenders look into your credit report and your credit score when you apply for a loan. If you have a bad credit score, you could be rejected when you apply or you could be charged a higher interest rate when you borrow. This can be very costly. Therefore, you’ll want to make sure that you know your credit score and how it’s calculated.
Understanding your credit score starts by knowing what’s in your credit report.
What Is A Credit Report?
Your credit report is a record of your debt. Any loans that you have taken out in the last six years are listed in your credit report, as well as the limit on your loan accounts, how much you owe on these loans, and your history of making payments.
Anyone who has ever borrowed money or taken out a loan in Canada has a credit report.
Your credit report is used to calculate your credit score.
Calculating Your Credit Score
Credit scores are a three-digit number that represents the information in your credit report. Credit scores range from 300 to 900, and higher is better.
Each person’s credit score is calculated by Canada’s two credit-reporting agencies: TransUnion and Equifax. However, these agencies do not reveal the specific formula that is used to calculate a credit score.
That said, it is known what information is used to calculate the score. The factors involved with calculating your credit score are:
- Your payment history
- How often you pay your bills on time
- How much of your available credit you are using
- The length of your credit history
- How often you apply for more credit
Of all of the above factors, your payment history is known to be one of the most important. Lenders want to see that you have successfully borrowed money and paid it back on time in the past. Therefore, if you make payments late or if you miss payments, this will hurt your credit score.
What Makes a Good Credit Score
There is no credit score that is officially defined as “good.” However, it is generally accepted that:
- A person with a credit score lower than 650 will likely have some issue getting new credit
- A person with a score between 300 and 559 is considered to have “poor” credit
- Any credit score between 650 and 749 can be considered as “good.”
- A score higher than 750 is considered an “excellent” credit score.
It’s important to keep in mind that your credit score is designed to help lenders understand the likelihood of you being able to pay back a loan. Therefore, they want to see that you have paid back loans in the past. If you do not have any debt and you haven’t applied for any loans in the last few years, this could be considered good for your financial health, but it doesn’t necessarily mean you will have a good credit score.
Instead, borrowing a reasonable amount and paying it back on time will improve your credit score.
Improving Your Credit
If you would like to improve your credit score, remember the factors that go into calculating it.
- Pay your bills on time
- Don’t use too much of your available credit
- Do not apply for credit too often
- Display a successful history of repaying debt
Paying your bills on time for an extended amount of time and not overextending yourself financially will help improve your credit score.
There is no “quick fix” that will fix your credit score overnight. It takes time and effort to improve your credit score.
Checking Your Credit Score
You can get a copy of your credit report for free from TransUnion and Equifax. They will mail a copy of your report to you. If you want an instant report available through the internet, you will have to pay. You will also have to pay to find out your credit score directly from the TransUnion and Equifax.