Check it: staying on top of your credit score

We know numbers don’t define you, but your credit score does sum up your overall financial health. If you’re looking to apply for a mortgage, rent an apartment, start a business, get a loan, or–depending on your industry–start a new job, your credit score will come into play. Building and maintaining strong credit in Canada is possible for everyone with the right information and a little bit of strategy.

First, the basics. What is a credit score?

A credit score is a three-digit number between 300 and 900 that represents your creditworthiness, or how reliably you’ll be able to pay off a loan. It’s calculated based on your credit report–a detailed record of your credit history. The two main credit bureaus in Canada, Equifax and TransUnion, use proprietary formulas to generate your credit score. Potential lenders and landlords then use it to evaluate the risk of working with you.

Let’s break down your credit report

Your credit report includes detailed information about you and your credit history that will ultimately make up your score.

• Personal information like your name, address, and birth date
• Credit accounts like credit cards, loans, and mortgages
• Your payment history
• Credit inquiries made on your behalf
• Public records like bankruptcies

You got a free copy of your credit report from Equifax or TransUnion. Now what?

First, go through your report to make sure all the information they have is accurate. Next, you’ll want to get a sense of how well you’re doing. A good credit score in Canada is typically 700 or above. This can help you qualify for better interest rates on loans and credit cards, it can lower insurance premiums, and as mentioned above, it helps with mortgage and rental housing applications. If your score is below 600, you’ll want to take some steps to improve it.

Playing the game: how to improve your credit score

As with so many things in modern life, if you want to win, you have to play the game. No matter where you are now, here are a few ways to start getting ahead and bringing that credit score up today.

• Make your payments on time. Your payment history has the biggest impact on your credit score, accounting for about 35% of the calculation. Setting up automatic payments or payment reminders can help make sure you never miss a payment. You can set up automatic payments through Coastal Community online banking.
• Keep credit card balances low. Your credit utilization refers to the amount of credit you’re using compared to your total available credit. This amounts to about 30% of your credit score. Keeping your credit utilization below 30% is a good rule of thumb. Getting a higher credit limit can help if you’re eligible for it and if you’re confident you can avoid pushing your spending up.

• Build your credit history. The length of your credit history accounts for about 15% of your score. Build history by keeping older credit accounts open and active to demonstrate responsible spending over time. If you have older credit cards you don’t use anymore, consider using them once in a while instead of cancelling.
• Limit new credit applications. Every time you apply for credit, it results in a hard inquiry on your credit report. These applications can temporarily lower your score.

• Diversify! Just like having a diverse investment portfolio leads to better returns, a mix of credit card and mortgage payments, for example, can improve your score.
• Keep an eye on your credit report. Regularly review your credit report for mistakes or any fraudulent activity. If you find an error, you can dispute it with the credit bureaus to make sure your report is accurate so you can get back on track.

Above all, don’t panic!

Building and maintaining a good credit score is all about time and consistency. Your past credit missteps will disappear with the sands of time; it’s never too late to start improving your credit profile.

Building credit from scratch

If you have never built credit before, or you’re just starting to build your credit as a young person or newcomer to Canada, here are a few of our favourite strategies:

• Become an authorized user on someone else’s credit card. Ask a family member or friend with a good credit history to add you as an authorized user on their card. This can help you establish a credit history relatively easily, and it’s a perfect tactic for young people who can be added to their parents’ cards.
• Get a credit-building loan. These loans are designed specifically to help you establish credit. The lender holds the loan amount in an account, and you make monthly payments to build your credit.
• Get a student credit card. Most credit card companies have cards designed for students. They have lower limits, are easier to get, and they’re perfect for young adults to practice financial responsibility and start building credit.
• For newcomers to Canada, bring your credit history from your home country. Student cards and credit-building loans are good options for newcomers to start building credit.

Busting some credit score myths

We’ve covered the best ways to maximize your credit score and with it, your borrowing power. Here are a few of the most common myths around credit scores, including some surprising things that don’t actually impact your score.

Myth: cancelling credit cards helps your score

Closing your credit card accounts can hurt your score by reducing your total available credit. You’ll end up using a larger percentage of your overall available credit, and you’ll be losing the credit history you had with that card.

Myth: checking your score hurts your score

Checking your own credit score is considered a “soft” inquiry and does not negatively impact your score. But when a lender checks your score, that’s considered a “hard” inquiry which temporarily lowers your score. This includes credit card applications, as well as applications for mortgages and other loans.

Myth: a higher salary means a higher score

You can have a high or low credit score at any income, and regardless of your employment history or status. Credit scores are based solely on your credit history and payment behavior.

Building and maintaining a strong credit score in Canada is essential for your financial well-being. By understanding the basics of credit scores, regularly monitoring your credit report, and practicing responsible credit habits, you can set yourself up for success.

Looking for some guidance? Consider booking a consultation with a financial advisor who can give you some strategies for improving your credit profile.