Technology

What Is A Credit Score?

By Nest Wealth on 27/09/2016Article 5 Minute Read

Read More

Credit scores: the magic number that will determine if you qualify for credit. Banks use your credit score to determine whether or not you qualify, and if so, how much interest they’ll charge you (the higher your credit score, the lower your interest rate will most likely be). Insurance carriers, landlords, and prospective bosses (to name a few more) rely on credit scores to see if you’re a good credit risk (creditworthy).

So, how do you know if your credit score measures up? Let’s find out!

Credit scores: the magic number that will determine if you qualify for credit. Banks use your credit score to determine whether or not you qualify, and if so, how much interest they’ll charge you (the higher your credit score, the lower your interest rate will most likely be). Insurance carriers, landlords, and prospective bosses (to name a few more) rely on credit scores to see if you’re a good credit risk (creditworthy).

So, how do you know if your credit score measures up? Let’s find out!

What Is A Credit Score?

A credit score, simply put, represents how likely you are to pay your bills on time. It’s a three-digit number that ranges from 300 (poor) to 900 (excellent). The higher your credit score, the lower risk you are to lenders, the lower your interest rates will be (no guarantee, but more likely), and the more probable you are to be approved. Here’s how credit scores breakdown:

  • 300 – 559 – Poor Credit Score
  • 560 – 659 – Fair Credit Score
  • 660 – 724 – Good Credit Score
  • 725 – 759 – Very Good Credit Score
  • 760 – 900 – Excellent Credit Score

How Is A Credit Score Calculated?

Your credit score is determined by a range of criteria, including:

  • Payment history: This is the most important factor in your credit score because creditors want to know if you’re going to pay them back, and your payment history will illustrate that.
  • Total debt: When applying for credit, how much you’re already in debt is important to any potential lender. Your payment history determines whether or not you can manage more payments in your budget.
  • Duration (Length of Credit History): Having a longer credit history helps creditors put together an accurate picture of how you use credit, and if you use it responsibly. It also tells them how you got through difficult financial times.
  • Types of Credit Used: Different types of credit can demonstrate how you generally handle your money.
  • New Credit: Frequently applying for more credit can reflect negatively on a credit score, and it’s a fair concern for lenders to have because the more new credit someone gets, the harder it can be to stay on top of payments.

Lenders may also consider things like if you’ve ever declared bankruptcy, your income, assets, and why you’re applying for credit.

Pros and Cons of Credit

There are pros and cons to credit (as with everything else). Here are what I believe are the pros:

  • Having credit can help keep track of your spending (track your purchases and spending behaviour) so you can create an effective budget.
  • You can make automatic payments to bills, so you never miss a payment again (just make sure you pay off your credit card each month).
  • If you lose your credit card (which I don’t recommend anyone do) you can cancel your card. Once you lose cash, it’s gone!
  • Credit provides immediate access to funds should they be needed (like if you have an emergency and no emergency fund, credit can give you the money you need and flexibility to pay it back).
  • Rewards can be collected and redeemed for produces or services (like traveling)!

Now for the biggest credit cons:

  • Black marks (such as late payments) stay on your credit record for seven years. The older the black marks on your record, the less they affect your score
  • Interest and Fees can help you rack up charges. Understand the costs associated with spending, and be prepared to pay off your balance (if you don’t, you’ll be charged interest).
  • Debt. Credit can lead to debt if not repaid. This is a simple, but important fact to remember.

Know Your Number – Check Your Credit Report

Surprisingly, a lot of people aren’t aware of what their credit score is. If you’re interested, you can order your credit report online or by mail through Equifax.ca and TransUnion.ca (for a fee). Your credit report contains identifying information, credit history information, and public records. *

What If You Have A Low Credit Score?

Time to turn over a new financial leaf! I would start by focusing on managing money better (with a budget!), dealing with debt, and only applying for credit that’s really needed.

* http://www.getsmarteraboutmoney.ca/en/managing-your-money/planning/managing-debt/Pages/Check-your-credit-report.aspx#.V-qW1qIrIsk