I have spoken to many clients that are trying to navigate the massive price increases on everything – from groceries to gas to rent or mortgage payments. It’s a tough go for sure. I have heard from many folks and I am greatly aware of the choices that people are making in their lives, and it’s brutal.
All the while, everyone was watching and waiting for some reprieve from the BoC, household debts continue to climb and credit scores are looking, let’s say, a little less than decent. So now there is a little glimmer of light and interest rates are starting to trend in the right direction…time to go out and borrow money, right?
Not so fast! The next step is that we need to understand how our credit scores look and how to correct them if they look, let’s say, less than decent! The value of good-to-great credit will have a tremendous impact on your finances:
better credit = better interest rates
Credit scores are designed to gauge how reliable a borrower is. Your credit score is a number ranging from 300-900 (well, 850 is considered to be the top of the pile actually). In order to improve your score, you really need to understand how the score is calculated and follow the recommendations to improve.
Here’s how it tracks:
The Fundamental Inputs
- Payment history, including any late or missed payments, and
- “utilization,” or how much available credit is used, each make up around a third of the total.
Other factors:- including credit checks,
- the mix of credit products,
- how long someone has had an account, and
- any public filings of defaults or bankruptcies
The Plan
First thing first, since payment history is such a big contributor, it’s crucial to not skip a minimum payment. If you’ve got a credit score you’re determined to rebuild, then that minimum payment, not the balance, but the minimum payment — comes before all else.
Next, let’s talk utilization. People often misunderstand utilization when it comes to credit. There are people that believe to boost their scores, they should max out a credit card and pay it back right away. They believe it shows how reliable they are, but it backfires because credit rating agencies prefer about a third of the available credit be used up. Lenders don’t like it when they see you are overextending and maxing your credit limit.
After you consider and evaluate your utilization, it is possible to try and increase your credit limit…either on an existing card or with a new one. Now, this is risky business because this means access to more funds and without a little discipline and spending-control, these funds can be spent, and the extra credit space used up. This strategy only works if you are well in control of spending and won’t use the extra space. One idea for this strategy is to apply for a store card. When you are approved, cut up that card as soon as it arrives!
Outside of conventional ways to boost your score are a growing number of ways to help your score:
How Do You Know if it’s Working?
Checking your credit score yourself is much easier these days, with all sorts of free options including directly through the rating agencies, banks, or options like Borrowell or Credit Karma. It’s a good idea to check your credit score records to make sure there aren’t any errors or lingering problems like a forgotten bill that’s gone to collection.
Credit checks DO count toward your credit score. When lenders and others ask a credit bureau for your credit report, they record it as an inquiry. Inquiries from lenders are considered hard inquiries, and they appear on your credit report and count toward your credit score. Anyone who views your credit report will see these inquiries.
Soft checks are credit inquiries that you pull and they also appear on your credit report. They're recorded on your credit report but only you can see them. These credit checks don't affect your credit score.
Simply put, do not rapidly, or constantly apply for new credit because the bureaus and the score will take it as you’re in crisis.
To wrap it up, yes, it is very important to understand credit scores, it’s also good to remember that improvements take time…if you find yourself in trouble today, remember this – the best time to plant a tree was 20 years ago…the next best time is right now. Get started, make small and positive changes, ask for help if you are unclear, and most importantly, get the right financial fundamentals in place. If you have good spending habits, if you have good debt repayment habits and you’re paying off your debt, your credit score will reflect that over time.
Remember, this is your money. Let’s make it work for you!