Why You Should Care About Your Credit ScoreApr 08, 2018
Canadians seem to be no strangers to debt, with household debt levels reaching record highs regularly. While the use of credit is commonplace in Canada, knowledge around credit scores and credit reports appears to be lagging behind.
In 2017, TransUnion released a survey showing that 56 per cent of Canadians didn’t know how their credit score is calculated. Earlier this year, Capital One found that 60 per cent of Canadians didn’t know their credit score and a staggering 73 per cent didn’t know how their score is calculated.
Why do your credit score and credit rating matter?
Your credit score and credit rating help financial lenders determine the risk of lending you money. The lower your credit score, the higher the risk the lender sees and may decline your credit request or require a cosigner for you to be approved.
This could impact your ability to get:
- a mortgage for the home you want to buy
- a line of credit to help with renovations
- a loan to consolidate debt
- approved for a rental apartment
- even something as small as a cellphone contract
How is your credit score calculated?
Credit scores are determined by five main factors:
- Payment history accounts for about 35 per cent of your score and looks at how often you make your payments on time.
- Credit utilization makes up 30 per cent of your score and compares how much consumer debt you owe to your credit limits. To maintain a good credit score, you’ll want to use less than 30 per cent of your credit limit.
- Length of credit history factors into about 15 per cent of the credit score. This looks at how long your accounts have been open, as well as their credit rating during that time.
- New credit is about 10 per cent of your score. This is based on how many loans or credit cards you’ve applied for lately.
- Credit mix is the final 10 per cent of your score. This looks at the types of credit you have (mortgages, revolving debt and installment loans) and your ability to manage multiple types of credit.
What are some common myths around credit scores?
There are a number of different myths around credit scores. We’ve busted three myths below…
Myth #1: You only have one credit score.
Wrong. TransUnion and Equifax are the accredited credit score providers in Canada and they use different software, so they will have different scores as a result. Other banks and lenders might have their own scores, but you will not be able to access these.
Myth #2: You can get your credit score for free from Equifax or TransUnion.
Wrong. You can get one free credit report annually from either Equifax or TransUnion, but only if you request it by mail. You must pay to access your credit report online, or to get your credit score from these two agencies.
Myth #3: A larger income means a better credit score.
Wrong. Your income may help you access more credit, but it has no impact on your credit score. No matter how much you earn, the path to a good credit score is not borrowing more than 30 per cent of your limit and making all your debt payments on time.
For more details on these and other credit score myths, head over to My Money Coach.
What steps can you take to improve your credit score?
You’ve taken a great first step toward improving your #FinancialLiteracy about credit scores, reports, and ratings by reading this article, but don’t stop here. The Financial Consumer Agency of Canada has an Understanding Your Credit Report and Credit Score Guide, which is definitely worth your time to read.
Everyone will have their own reasons to care about their credit score, but the key takeaway is that you need to know what it is. By knowing your credit score and reading your credit report, you can work toward improving it, no matter where your current score stands.