Written for: GO Easy Financial
Credit Scores
Life, on the whole, seems to have standard milestones—find a job, get married, buy a car, invest in a home—and while we may be educated, financially stable, and well-situated enough to achieve these (and other) milestones, the scary fact is: none of that matters without a credit score.
Your credit score is, to put it bluntly, the numerical expression of your entire financial identity. But what comprises the score?
“People want to know, ‘How am I being ranked?’” says Jeff Schwartz, Executive Director of Consolidated Credit Counseling Services of Canada, Inc. “You want to know how you’re being measured.”
Based on a scale of 300-900, everything is taken into consideration, including your payment history. But it’s important to remember that being on time with bill payments does not necessarily ensure a healthy credit score: credit payment history only accounts for 35 per cent of your total score, leaving the other 65 per cent divided among four other factors used by Canada’s top three credit bureaus.
“Your history of the credit card accounts for 15 per cent of the score,” explains Schwartz. “The longer you have the credit card, the better.” He also notes that a further 10 per cent is allocated depending on the type of credit (revolving or installment) a client has—with credit bureaus looking more favourably upon clients with diversified credit types in their financial history. The number of times a client applies for new credit is also considered.
“If a lender or credit bureau sees that you are constantly applying for new credit, it does not look that great,” cautions Schwartz. “They may start to wonder about the state of your finances.
The fifth and final factor is what Schwartz calls the credit utilization ratio: worth a whopping 30 per cent, it is used to calculate the amount of credit available to a client versus the amount the client actually uses. Constantly using all, or almost all, of your available credit can actually work to your detriment.
“Generally keeping it below a 40 per cent ratio is best,” advises Schwartz. In fact, having multiple credit cards can actually benefit a client in this case—by separating the credit into two or even cards, the credit utilization ratio remains relatively low on each.
So now you have a score—what then?
“Access to these scores is to the consumer and to who they give permission to,” says Schwartz. Without explicit permission, no one is allowed to view your score at all.
“More and more people are using it as an assessment of you,” explains Schwartz. Which is why, in certain circumstances, people like landlords or employers may ask to see a credit report to assess your candidacy. Having a high credit score is not just a badge of honour; it can also protect your finances by allowing you to have lower interest rates, and could work to save you money on goods and services that you need.
A word of caution: as credit becomes a more intrinsic thread in our financial fabric, it is also becoming increasingly susceptible to fraudulent activity. Schwartz recommends pulling your credit report at least once a year to ensure that there is nothing suspect or untoward in your credit history.
“Credit reports are not infallible,” he explains. “Your report could be merged with someone else’s, especially if you have similar birthdays or names. This is why data breaches are so incredibly frightening. But if you take care of what goes into your credit score, the score will take care of itself.”