From Rachel Surman @ Borrowell
You probably have an idea of what a credit score is and maybe you’ve even checked it once or twice. But do you know why your credit score matters? Not to worry! We’ve got you covered with the basics of credit scores, why they matter, and what you can do to improve yours.
What is a credit score?
Credit scores range anywhere from 300-900 – depending on the scoring model. At Borrowell, we provide the Equifax Risk Score (ERS) 2.0 credit score, a popular and legitimate score used by many banks and lenders. Borrowell buys the scores and reports from Equifax and we recommend financial products based on your credit score that you have a high likelihood of being approved for.
Your score is calculated through careful analysis of information in your credit report by the credit bureau, either Equifax or TransUnion. Financial institutions use this information to help make decisions about the services and products they offer you, such as interest rates and insurance premiums.
Why does my credit score matter?
Many Canadians don’t realize the importance of having a good credit score. But the reality is, it affects so many aspects of your financial life! Having a good credit score just makes life easier. It can help you:
- Access better financial products, such as the best credit cards
- Save money on interest: a good credit score means lower insurance and mortgages rates
- Protect yourself from identity theft by keeping up to date on inquiries on your credit report
- Snag your dream rental! Landlords want to know your credit score to see how likely you are at paying your bills on time
How is my credit score calculated?
Credit bureaus calculate your credit score by weighing a variety of factors on your credit profile. Here’s how Equifax calculates your credit score:
- Payment history (35%) – Your payment history is how good you are at paying your bills on time. This is the most important factor that goes into your credit score.
- Credit utilization (30%) – Your credit utilization is how much available credit you’re using. To figure out your credit utilization ratio, add all the balances of your accounts. Then add the credit limits. Divide the total balance by the total credit limit and multiply by 100. Voila – you have your credit utilization ratio!
- Age of credit history (15%) – The age of your oldest account matters because lenders like to see that you’re responsible. It’s beneficial to have a long history of paying your bills on time.
- Credit inquiries (10%) – A credit inquiry is when a bank or lender makes an inquiry about your credit to determine your creditworthiness. This is called a hard inquiry which can slightly negatively affect your score. A soft inquiry, on the other hand, is when you check your score yourself using a tool like Borrowell. Soft inquiries don’t affect your credit score.
- Total number of accounts (10%) – Having too few or too many accounts open can affect your credit score. If you have a lot of accounts, it might be beneficial to consider closing ones you don’t use anymore.
- Public records/derogatory marks – Bankruptcies and derogatory marks can have a serious impact on your credit score. Do your best to avoid them.
Some of these carry more weight than others, but all are important to your credit score.
What’s a good credit score?
So maybe you’ve already checked your credit score with Borrowell. Your credit score is actually quite easy to understand because essentially, the higher your credit score, the better! Credit score ranges go like this:
- 741 or more – Congratulations! You have an excellent credit score. You can consider yourself a credit guru.
- 713 to 740 – You have a good credit score. You can expect to receive very good interest rate offerings on the credit products of your choice.
- 660 to 712 – This is considered fair or average to lenders. But once you get to 660, you’re entering into average credit score territory.
- 575 to 659 – This is a below-average credit score. But don’t worry! We’ve got some tips below to help you improve your credit score.
- 300 to 574 – This is a poor credit score and it needs improvement. Again, keep reading to see some improvement suggestions below!
How can I improve my credit score?
Now that you know where you stand in terms of your credit score, there are a few different ways to improve it. Here are a few of the most effective ways of doing just that.
1. Pay your bills on time
As mentioned above, paying your bills on time makes up a whopping 35% of your credit score! Set up pre-authorized payments on all of your bills, especially the ones that report to the credit bureau. These include mortgages, student loans, auto loans, and credit cards. These can also include your utilities, cell phone, insurance, etc.
2. Watch your credit utilization
When it comes to improving your credit score, watching your credit utilization is definitely underrated. Creditors look at the amount of credit you have available and the amount you’ve used. Keeping the balance on your card low looks good on your credit report for anyone that’s checking out your credit.
A good rule of thumb is to keep your credit utilization below 30%. This means if you have a credit card with a limit of $3,000 – you should keep the balance below $1,000.
Bonus tip: raising your credit limit (while it may seem a little counterintuitive!) can help you keep your utilization low since you’re increasing your available credit. This creates a more favourable credit utilization ratio.
3. Give the Borrowell Credit Coach a try!
The Borrowell Credit Coach – Canada’s first free AI-powered Credit Coaching tool – provides a free credit check, monitors your credit, analyzes your credit profile, and even sends you tips on what you can do to improve your credit score. If you’re serious about credit improvement, it’s time to meet Molly, you’re new Credit Coach!
The last word
Your credit score can be thought of as a general indicator of your overall financial health. Knowing and understanding your credit score is the first step to taking control of your finances and planning for the future.
Borrowell is a partner of PolicyMe. Check your free credit score with Borrowell in 3 minutes or less.