What is a Credit Score and Why Does My Credit Score Matter?
Your credit score is critical and you build it up (or bring it down!) without even thinking about it. In this article, we’ll keep it simple and break down what is a credit score, why your credit score matters and some other good-to-know points.
What is a credit score?
Your credit score is a measure of your credit trustworthiness, aka your credit risk, aka how likely you are to repay debt. A higher credit score means you’ve dealt responsibly with credit in the past and so, potential lenders and creditors are more confident in your ability to repay a debt.
Why does it matter?
It matters because lenders, such as banks, use your credit score before deciding whether they should a. lend you money, b. how much they should lend you and c. how much they’ll charge you (your interest rate). These are important when you’re looking to get a mortgage for a property!
Other service providers, including cell phone companies, utilities providers and landlords, also look at your credit score because they want to make sure you’ll pay them and that you’ll pay them on time.
How do I get my credit score?
Each country will have its own credit bureaus, which create and provide credit scores and credit reports. In Canada, Equifax and TransUnion are the national credit bureaus.
Keep in mind that credit scores can be different depending on the bureau. This is because they use different algorithms and metrics and because some lenders will report to only one bureau and some lenders will report to the bureaus on different dates.
What is a good range for a credit score?
Credit scores can range from 300 to 900. The higher your score, the better it is.
According to Equifax,
- 760 and up is considered excellent
- 725 to 759 is considered very good
- 660 to 724 is considered good
650 is about the average credit score of Canadians. A poor rating is generally considered a credit score of 560 or lower. This would mean you could have difficulty getting loans and/or getting good loan terms.
How is it calculated?
The first two (payment history and credit availability) account for the biggest chunk, about 65% combined:
Payment history
The type and number of accounts you paid on time, how late your payments were (if ever), how much you owed, whether you missed any payments
How much credit you’re using vs. how much you have available
This is how much credit is being used on your credit cards and other revolving lines of credit compared to the total amount you have available to use
Length of your credit history
This means how long your accounts have existed, including your oldest and newest. If you’ve heard the advice to get a credit card while you’re a teenager in order to build up credit, its for this factor. It shows how long you’ve been dealing with credit.
Public records
History of bankruptcy, collection issues or other negative public records
Inquiries
“Hard” inquiries are the only inquiries that affect your credit. These are used when you apply for new credit, such as a credit card or loan. These have a negative impact because, in some situations, applying consistently for new loans in a short amount of time may be a sign of financial trouble or living beyond your means. However, these inquiries are used in conjunction with other warning indicators (if any).
“Soft” inquiries for pre-approved credit offers and ordering your own credit report won’t affect your credit score.
In our next article, we’ll cover how your credit score impacts your ability to buy property. We’ll also give you a rundown of you can improve your credit score to maximize your buying potential.