Your Credit Scores Are An Important Aspect Of Your Financial Profile
They may be used to determine some of the most important financial factors in your life, such as whether or not youll be able to lease a vehicle, qualify for a mortgage or even land that cool new job.
And considering 71 percent of Canadian families carry debt in some form , good credit health should be a part of your current and future plans.
High, low, positive, negative theres more to your scores than you might think. And depending on where your numbers fall, your lending and credit options will vary. So what is a good credit score? What about a great one? Lets take a look at the numbers.
What Affects Your Credit Scores
Common factors can affect all your credit scores, and these are often split into five categories:
- Payment history: Making on-time payments on your credit accounts can help your scores. But missing payments, having an account sent to collections or filing bankruptcy could hurt your scores.
- : How many of your accounts have balances, how much you owe and the portion of your credit limit that you’re using on revolving accounts all come into play here.
- Length of credit history: This category includes the average age of all your credit accounts, along with the age of your oldest and newest accounts.
- Types of accounts: Also called “credit mix,” this considers whether you’re managing both installment accounts and revolving accounts . Showing that you can manage both types of accounts responsibly generally helps your scores.
- Recent activity: This considers whether you’ve recently applied for or opened new accounts.
FICO® and VantageScore take different approaches to explaining the relative importance of the categories.
Very Good And Excellent/exceptional: Above Mid
A lender could deny anapplication for another reason, such as having a high debt-to-income ratio, butthose with top credit scores likely wont have their applications deniedbecause of their credit scores.
People in this score range are also most likely to get offered a low interest rate and may have the most options when it comes to choosing repayment periods or other terms.
Should I just apply anyway?
Its best not to because each application can result in a hard inquiry, which could hurt your credit. You can research your likelihood of being approved by checking for a particular card or by getting prequalified for an offer .
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Whats A Utilization Ratio Or Debt
According to Equifax, your debt-to-credit ratio, also known as your utilization ratio, is the amount of your debt compared to your credit limit.5 Your debt-to-credit ratio is important because if your ratio is high, it can indicate that youre a higher-risk borrower.5 Thats because lenders see borrowers who use a lot of their available credit as a greater risk.5
For example, imagine you have a couple of credit cards and a line of credit with a total debt of $14,000 and a combined limit of $20,000. Your debt-to-credit ratio would be 70%.
According to the Government of Canada, a ratio of 35% or below on credit cards, loans and lines of credit is recommended.3
How To Go From Good To Great
To borrow from Leo Tolstoy, all great credit scores are alike, but all bad credit scores are bad in their own way. That is, ideal credit scores are built on a similar set of healthy financial habits, but your scores can be damaged by any number of factors. There are many different issues that can hurt your credit, such as:
Late or missed payments. Too many open credit accounts. High credit card balances. High balances on loans. Too many credit applications.
The first step toward improving your credit health is avoiding getting trapped in the highs and lows of managing your credit.
Heather Battison, vice president of TransUnion Canada explains how consistency is key: The most important factor for building and maintaining your scores is to pay your bills on time and in full each month. This activity demonstrates your ability to responsibly manage credit and can positively impact your credit scores.
Its also key to remember that your payment history isnt just about paying your credit card bill. It also includes things like your cellphone bill, says Trevor Gillis, associate vice president of account management at TD Credit Cards.
Gillis says building good credit scores is based on using your credit card responsibly, which means making at least the required monthly minimum payment , making your payments by the payment due date and keeping your credit card utilization low.
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How To Improve Your Credit Scores
To improve your credit scores, focus on the underlying factors that affect your scores. At a high level, the basic steps you need to take are fairly straightforward:
- Make at least your minimum payment and make all debt payments on time. Even a single late payment can hurt your credit scores and it’ll stay on your credit report for up to seven years. If you think you may miss a payment, reach out to your creditors as quickly as possible to see if they can work with you or offer hardship options.
- Keep your credit card balances low. Your is an important scoring factor that compares the current balance and credit limit of revolving accounts such as credit cards. Having a low credit utilization rate can help your credit scores. Those with excellent credit scores tend to have an overall utilization rate in the single digits.
- Open accounts that will be reported to the credit bureaus. If you have few credit accounts, make sure those you do open will be added to your credit report. These could be installment accounts, such as student, auto, home or personal loans, or revolving accounts, such as credit cards and lines of credit.
- Only apply for credit when you need it. Applying for a new account can lead to a hard inquiry, which may hurt your credit scores a little. The impact is often minimal, but applying for many different types of loans or credit cards during a short period could lead to a larger score drop.
How Are Credit Scores Determined
A credit score is a number that indicates your perceived creditworthiness in the eyes of credit rating companies, banks and other financial institutions. If you have a history of paying your bills on time and only using a small percentage of your available credit, you should have a high score. If youve missed bills, filed for bankruptcy, defaulted on loans or dealt with collections, then your score will likely be lower.
Heres a deeper breakdown of what goes into the creation of your credit score:
- Payment history: 35% of your score
- 30% of your score
- 15% of your score
- New credit applications: 10% of your score
- 10% of your score
The most well-known provider of credit scores is the Fair Isaac Corporation, or FICO. However, each of the three credit bureaus has its own take on your score. This is known as a VantageScore, and it is a modified version of your FICO score thats based on both the credit bureaus scoring models and their own information on your credit history.
There are also different FICO credit scores for bank cards, auto loans and more. Thats why a single person can have several credit scores. Different bureaus may treat credit events or authorized user accounts differently, so you may have excellent credit according to your Transunion credit score, but still be in the good range with your Equifax score.
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Factors That Affect Credit Scores
So, you can see credit-scoring models and credit reports are two big factors that determine your credit score. But if you donât know what information from your credit report is being used, itâs not much help.
Here are a few factors the CFPB says âmake up a typical credit scoreâ:
- Payment history: How well youâve done making payments on time.
- Debt: How much current unpaid debt you have across all your accounts.
- A ratio that reflects how much of your available credit youâre using compared with how much you have available. is usually expressed as a percentage.
- Loans: How many loans and what kinds they are, such as revolving credit accounts and installment loans. Sometimes this is called your credit mix.
- How long youâve had your accounts open. But remember, what qualifies as your oldest line of credit depends on whatâs being shown in your credit reports.
- New credit applications: How many times youâve applied recently for new credit. The effect on your scores might be minor, but a lot of new hard credit inquiries could still give a negative impression to lenders.
How Does FICO View Those Credit Factors?
FICO is pretty specific about what it views as the most important credit factors: Payment history makes up about 35% of its scoring. About 30% is based on the total debt. The other primary factors are credit history , credit mix and new credit .
How Does VantageScore View Those Credit Factors?
What Is A Poor Credit Score Range
Poor credit score = 550 619: Credit agencies consider consumers with credit delinquencies, account rejections, and little credit history as subprime borrowers due to their high credit risk. Although it is possible to qualify for credit, it is often at very disadvantageous terms you will pay much higher interest rates and penalty fees.
If you find yourself in this range, you should begin to address any specific credit problems you have to try to boost your score before applying for credit. Subprime borrowers typically become delinquent 50% of the time.
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What Is A Fair Credit Score Range
Fair credit score = 620- 679: Individuals with scores over 620 are considered less risky and are even more likely to be approved for credit.
In the mid-600s range, consumers become prime borrowers. This means they may qualify for higher loan amounts, higher credit limits, lower down payments and better negotiating power with loan and credit card terms. Only 15-30% of borrowers in this range become delinquent.
What Is A Good Credit Score For An Auto Loan
Next to a mortgage, vehicles are often among the most expensive purchases the average adult makes in the United States. According to the Kelley Blue Book, an independent automotive valuation agency, the average price for a light vehicle purchase in the U.S. was $38,940 in May of 2020.
For a significant purchase like a car, having good credit could mean saving thousands when youre financing your purchase.
For example, someone with a FICO score of 620 who is looking to buy a new car is told by the car dealer they could qualify for a 60-month loan for $38,000.
According to the FICO Loan Savings Calculator, your loan in June 2020 would have an APR of 16.714% and your monthly payments would be $939. Over the life of the loan, youd pay an additional $18,315 in interest.
A $942 per month car loan payment is a significant amount, even if you can get approved. So, lets assume you hit the pause button and decide to work on improving your credit before taking out a loan. When you apply again down the line, you learn that youve boosted your score to a 670, which is considered a good credit score by most credit scoring models.
With a 670 credit score, the FICO Loan Calculator now estimates that you might qualify for an APR around 7.89%. Based on that rate, your monthly payment on the same $38,000 auto loan would be $768. You would pay $8,106 in total interest over the life of your loan.
Because you improved your credit score from poor to good, you would save:
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What Affects Your Credit Score
On the list of what affects your credit score, two factors have the biggest influence: Payment history, which is whether you pay on time, and credit utilization, which is how much of your credit limits you have in use.
Other factors matter but carry a little less weight: how long you’ve had credit, whether you have a mix of credit types and how frequently and recently you’ve applied for credit.
What To Do If You Don’t Have A Credit Score
For FICO® Scores, you need:
- An account that’s at least six months old
- An account that has been active in the past six months
VantageScore can score your credit report if it has at least one active account, even if the account is only a month old.
If you aren’t scorable, you may need to open a new account or add new activity to your credit report to start building credit. Often this means starting with a or secured credit card, or becoming an .
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What Is A Good Fico Score
A good FICO score lies between 670 and 739, according to the company’s website. FICO says scores between 580 and 669 are considered “fair” and those between 740 and 799 are considered “very good.” Anything above 800 is considered “exceptional.”
According to FICO, the average credit score in 2021 was 716, which falls in the good range.
FICO comes from Fair Isaac Corp., the company that first developed a credit scoring system. It uses data about consumers from the three major credit reporting bureaus: TransUnion, Equifax and Experian.
FICO scores typically express a consumer’s creditworthiness as a number between 300 and 850.
What Is The Average Credit Score In Canada
While credit scores in Canada range from 300 – 900, the average is around 650, according to TransUnion, though it varies from province to province. Once you’ve reached a credit score of 650 or higher, you’ll be able to qualify for more financial products. A credit score below 650 is going to make it hard to qualify for new credit, and anything you are approved for will likely come with very high-interest rates.
Do you know your credit score? You can use Borrowell to get your credit score in Canada for free. With Borrowell, you’ll get weekly credit score updates, see exactly what’s impacting your credit score, and get personalized tips on how to improve your score. You can also find your free credit score here.
Check out this infographic that shows the average credit scores in Canada:
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How To Get A Good Credit Score
Good credit habits, practiced consistently, will build your score. Heres what you need to do:
Pay bills on time. This is important because payment history has the largest impact of all the factors in your score. A missed or late payment can do tremendous damage to a credit score and it can stay on your credit report for up to 7 years.
Try to keep your credit card balances well below your credit limits aim for, and lower is better. High utilization dings your score, but the damage will fade when you’re able to reduce your balances and the lower utilization shows up on your credit reports. You also may be able to lower utilization by getting a higher credit limit or becoming an authorized user on a lightly used card with a large limit.
Keep credit accounts open unless there is a compelling reason, such as high fees or poor service, to close them. Keeping older accounts open helps your average age of accounts, which has a small influence on your score. Also, closing an account cuts into your overall credit limit, driving up your credit utilization.
Avoid making several credit applications in a short time frame. Credit checks for the purpose of credit decisions can cause a small, temporary dip in your score, and several in a short time can add up. That’s why it’s important to research credit cards before you apply.
Monitor your credit reports and dispute information you believe is incorrect or too old to be included .
Why Your Credit Score Changed
Your credit score can change for many reasons, and it’s not uncommon for scores to move up or down throughout the month as new information gets added to your credit reports.
You may be able to point to a specific event that leads to a score change. For example, a late payment or new collection account will likely lower your credit score. Conversely, paying down a high credit card balance and lowering your utilization rate may increase your score.
But some actions might have an impact on your credit scores that you didn’t expect. Paying off a loan, for example, might lead to a drop in your scores, even though it’s a positive action in terms of responsible money management. This could be because it was the only open installment account you had on your credit report or the only loan with a low balance. After paying off the loan, you may be left without a mix of open installment and revolving accounts, or with only high-balance loans.
Perhaps you decide to stop using your credit cards after paying off the balances. Avoiding debt is a good idea, but lack of activity in your accounts could lead to a lower score. You may want to use a card for a small monthly subscription and then pay off the balance in full each month to maintain your account’s activity and build its on-time payment history.
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Increasing Your Credit Score
Knowing how credit scores are calculated means its fairly easy to figure out how to raise your score. But raising your score does take time. In most cases, you can instantly improve your score. The only way to get fast results is through credit repair, which can improve your score in as little as 30 days. But that only works if there are mistakes in your credit to correct. If you legitimately incurred a lot of negative items on your credit report, then its going to take some work to improve it.