We’ve all seen the commercials telling us to download an app to check our credit score “for free”, making it sound and feel like a deep dark secret we should know even if we have no idea what it means.
Maybe you’ve tried one of those free apps, only to be given a number with no context or explanation and no idea how to improve your credit score. The good news is that with a bit of dedication and patience, it’s absolutely possible to improve your credit score.
But before we get to that, it’s important to first understand why credit scores matter and where you currently stand. Ready to master your credit score? Read on!
Importance of your credit score
First thing’s first: what is a credit score? It’s a number that indicates your credit information at a particular time; it denotes the risk you represent for lenders compared to other consumers on a scale from 300 to 900. High scores on this scale are good; the higher your score, the lower the risk for the lender.
Chris Miranda, Branch Manager, Winnipeg Region at Westoba Credit Union, explains why your credit score matters. “Lenders use your credit score to determine how you have handled credit in the past and how likely you are to use it in the future. Think of it as a financial report card; much like a university will look at your high school GPA for admissions and scholarships, lenders will look at your credit score to determine what you’ll get approved for and what the interest rate will be.”
If you have a poor credit score, you may be denied credit, or you may need to obtain a co-signer to be approved for credit, you may have to pay a higher interest rate, and you may not be able to rent the apartment or get the job you want. The next step is to determine your credit score and make a plan of action to improve it.
Why your credit score with Westoba is more accurate than companies like Credit Karma
Equifax and TransUnion only collect information from creditors about your financial experiences in Canada.
Companies like Credit Karma offer you a free credit score and credit report in exchange for information about your spending habits. It then charges third-party companies (many of which are lenders that in turn provide Credit Karma with a kickback on every conversion) to serve you targeted advertisements.
Credit Karma uses the VantageScore model to calculate your credit score, while most lenders (including Westoba) use the FICO model. VantageScore and FICO are the two big rivals in the credit rating business. Their models differ slightly in the weight they place on various factors in your spending and borrowing history.
We’ll get to how your credit score is calculated, but it is important to note that you don’t have just one credit score. That might sound bizarre, but the reality is you have many credit scores, each calculated by a lender based on one of many models or versions of models such as VantagePoint and FICO. The number itself isn’t as important as the range, such as “good” or “very good”, because no matter the model used, the range should be quite similar.
“At Westoba, we give you more than just a number,” says Miranda. “Your financial advisor will explain your credit score, walk you through your credit report and give you advice on how to improve your score. And Westoba will never sell your personal information to third-party companies.”
How a credit score is calculated
According to the Government of Canada website, “it’s impossible to know exactly how much your credit score will change based on the actions you take. Credit bureaus and lenders don’t share the actual formulas they use to calculate credit scores.”
So, while there’s no cut and dry formula, there are a number of factors that may affect your credit score:
- How long you’ve had credit
- How long each credit has been in your report
- If you carry a balance on your credit cards
- If you regularly miss payments
- The amount of your outstanding debts
- Being close to, at or above your credit limit
- The number of recent credit applications
- The type of credit you’re using
- If your debts have been sent to a collection agency
- Any record of insolvency or bankruptcy
All that said, lenders set their own rules on the minimum credit score needed for them to lend you money. A good credit score may translate to lower interest rates, and the good news is that there are many things you can do to improve your credit score.
How to improve your credit score
There are a number of key things you can do to boost your credit score. Here are some things to implement right away to improve your credit score.
1. Make payments on time
Your payment history is the most important factor for your credit score.
To improve your payment history:
- make at least the minimum payment if you can’t pay the full amount that you owe
- contact the lender right away if you think you’ll have trouble paying a bill
- don’t skip a payment even if a bill is in dispute
- Use credit wisely
Miranda suggests never going over your credit limit because borrowing more than your authorized limit can hurt your credit score. “Try to use less than 35% of your available credit. It’s better to have a higher credit limit and use less of it each month rather than use large portions of it, even if you pay the balance by the due date.”
2. Increase your credit history
The longer you have a credit account open and in use, the better it is for your score. Your credit score may be lower if you have credit accounts that are relatively new. For example, some credit card offers come with a low introductory interest rate for balance transfers. This means you can transfer your current balance on an older card to this new product, but the new account is also considered new credit.
Consider keeping an older account open even if you don’t need it. Use it from time to time to keep it active and make sure there is no fee if the account is open, but you don’t use it.
3. Limit credit hits
If there are too many credit checks in your credit report, lenders may think that you are urgently seeking credit or about to take on large amounts of debt. Limit the number of times you apply for credit, apply for credit only when you need it, and try to get your quotes from different lenders within a two-week period when shopping around for a car or a mortgage (your inquiries will be combined and treated as a single inquiry for your credit score).
4. Vary your credit
Your score may be lower if you only have one type of credit. Try mixing credit products such as a credit card, a car loan and a line of credit (but don’t take on more debt than you can afford).
5. Budget wisely
This tip won’t directly impact your credit score, but it will impact your financial fitness and will indirectly affect the financial decisions that can cause your rating to go up or down. Speak to your financial advisor to take a holistic look at your financial picture and to put together a budget that works for you.
If you’re interested in learning more about your credit score or have specific questions about your Financial Fitness, our team can help! Call 1-877-WESTOBA to make an appointment or book a chat today!