Your Credit and You

Knowing your credit score and what it can do for you is the best first step in taking control of your financial future. This article talks about why your credit score is important, what determines your credit score, plus excellent tips for maintaining a healthy credit score. So, what is a good credit score?

But first, what exactly is a Credit Score?

A credit score is a number (usually between 300 and 900) that helps determine your credit worthiness. Credit worthiness is how lenders decide if they should lend you money or not. And if so, at what interest rate and what terms. The higher the credit score, the more likely you will be deemed credit worthy. The lower the score, and the less likely lending institutions will lend to you at all.

As you can see from the chart, your credit score is considered Very Poor if you're under 580; Poor 580-640; Fair 640-700; Good 700-750; Very Good 750+.

So what does it all mean, to you?

<580

With a credit score below 580, you will have a very difficult time being approved for any kind of loan. Even if you do find a lender, your interest rates could be as high as 50%.

580-640

With a credit score of 580-640, you are probably only eligible for secured products. If you do get approved, expect a very high interest rate.

640-700

With a credit score of 640-700, you may be approved for credit. Your offered rate may be decent. But, if you invest the time and effort into building your credit score now, you'll save a lot of money in the future.

In Canada, the average credit score is around 650, though it varies from province to province.

700-750

At 700-750 you're almost certain to be approved for credit, and can you probably expect a decent interest rate. If you want to unlock an even better rate, you can spend a short period of time improving on what you have so you can get even better terms. Once you start building excellent credit, it's a quick step up to the top tier.

750+

Congratulations! At 750+ you have one of the best credit scores possible. You're almost guaranteed the lowest interest rates, and as long as you can afford the monthly payments, you'll be approved for almost any loan.

What makes up a Credit Score?

Payment history:

Your payment history is a reflection of how you make payments on any loans or monthly accounts that are reported to credit agencies. This could include credit cards, car loans, mortgage payments, cell phone bills, or any number of other payment scenarios. If you pay your bills as scheduled and on time, you will develop a positive payment history. If you miss or are late on payments, you will negatively impact this portion of your credit score.

Used credit vs. available credit:

A key part of your credit score analyzes how much of your total available credit is being used on your credit cards, as well as any other revolving lines of credit. A revolving line of credit is a type of loan that allows you to borrow, repay, and then reuse the credit line up to its available limit. If you have all of your credit cards and lines of credit maximized it doesn’t look as good as it would if you had lots room left to borrow. Even if you make all of your payments on time, having all of your credit maxed creates a greater risk of default or missed payment.

Credit history:

This section of your credit file details how long your credit accounts have been in existence. The credit score calculation typically includes both how long your oldest and most recent accounts have been open. Basically, if you have managed your credit well for a long time chances are you will continue to do so. This can be a tricky aspect of building credit if you are new to credit, such as a young person just starting out or a new Canadian. Some lenders take this in to account with young buyers, new to the country, or recent graduates.

Public Records:

If you have filed for bankruptcy, have had accounts go to collection or have had wages garnished to repay a debt, the perception is that lending you money would be risky. If you have never had any of these issues in the past lenders can assume that you won’t have any in the future.

Inquiries:

Anytime an individual’s credit file is accessed for any reason, the request for information is logged on the file as an inquiry. Inquiries require the consent of the individual and some may affect the individual’s credit score calculation. The only inquiries which may impact a credit score are those related to active credit seeking (such as applying for a new loan or credit card). These inquiries may be the leading indicator, the first sign of financial distress that appears on the credit file. Not every inquiry is a sign of financial difficulty, and only a number of recent inquiries, in combination with other warning signals on the credit file should lead to a significant decline in a credit score. Also, self inquiries, those accessed by a credit advisor, or those pulled by a lender to pre-approve you for a credit offer shouldn’t negatively impact credit score.

How important is your Credit Score?

A good credit score may save you lots of money by giving you access to lower interest rates on loans.  It may also impact the time and difficulty of an application process. The better your credit score, the more likely that you would be eligible for “prime” lending rates. Those with poor credit scores may pay up to 3 or 4 times the annual interest rate on a term loan. This could literally cost you thousands of dollars. Those with a very poor credit score may not qualify for a loan at all.

QUICK DEFINITION - A PRIME RATE or prime lending rate is an interest rate used by banks, usually the interest rate at which banks lend to customers with good credit. Some variable interest rates may be expressed as a percentage above or below prime rate.

Tips for a Healthy Credit Score

Here are some tips to help you grow your credit score over time.

Pay your bills on time, every time. 

This doesn’t just include credit cards – late or missed payments on other accounts, such as cell phones, may be reported to the credit bureaus, which may impact your credit scores. If you’re having trouble paying a bill, contact the lender immediately. Don’t skip payments, even if you’re disputing a bill.

Keep your credit card balance well below the limit. 

Using a high proportion of your available credit may impact your credit score. Keep your balances well below your credit limits on all of your credit products.

Apply for credit sparingly. 

Applying for multiple credit accounts within a short time period may impact your credit score. Rightly or wrongly, this can alert lenders to the first signs of financial difficulty.

Check your credit reports regularly. 

Request a copy of your credit report or purchase a credit score on line. Make sure your personal information is correct and there is no inaccurate or incomplete account information. If you find information you believe is inaccurate or incomplete, contact the lender or creditor. You can also dispute any information that you feel is inaccurate.  Remember: checking your own credit report or credit score won’t affect your credit scores.

Spend less than you make.

Live within your means. Be realistic about what you can afford.  Develop a budget that allows you to have money left over at the end of the month. If you do a budget and find that you don't have month left over at the end of the money, something has to give. Look at your lifestyle and figure out what you can do to cut costs or what you can do to make more money.  Don’t use credit in lieu of income. That never ends well.

Buy what you need, not everything you want.

Shop with a list and stick to it. Use the Seven Day Rule for everything else: if you see something not on your list, wait 7 days. If you still want it after seven days, go back and purchase it. But if you don’t actually need the product, leave it in the store. Be a smart consumer, not an emotional spender.

TIP: Borrow infrequently used items such as hedge trimmers or saws from friends and family  - or use a product sharing service, which are frequently becoming more and more popular.

Want Help with your Credit?

Even if you don’t buy a car from us, we are happy to help you get a handle on your credit. We know that, sometimes, all anyone needs is help taking the first step in the right direction. And we are happy to help you.

Our Financial Services Professionals help people borrow money at favorable rates and terms every day. They work with and represent all of the major lenders in Canada as well as Kia Financial Services. Request a confidential Credit Review with one of our Financial Services managers here.