Your credit score is a three-digit number that will help determine some of the biggest investments you make in your life, like buying a home. The lower your score, the bigger risk you are in the eyes of mortgage lenders, so it’s important to understand how your credit works and how you can improve it too.
To better understand your credit score, it is calculated with five basic factors in mind:
- Your payment history: this involves when you pay your bills, any late or missed payments, and debts that may have been sent to a collection agency. It’s important to keep in mind that the later your payments, the bigger the impact on your credit score, so ensure you pay bills on time.
- Available credit: to figure this out, you simply add up the credit limits of all your credit products (credit cards, lines of credits, loans), then define how much of your available credit you actually use. Using a large percentage of your available credit, makes you seem like a bigger risk to a lender. Some experts say keeping 80-90% of your credit available, is the best practice.
- Lifespan of credit: this takes into account how long you’ve had each credit product, the longer you’ve had an account open and been using it, the better your credit score is because you’ve had time to build credit. Your credit score might be lower if you have new credit cards, or close older accounts.
- Number of inquiries: every time your credit report is requested, it’s counted as an inquiry, and numerous inquiries will count against your credit score. Because your credit report will usually only be requested when you are applying for credit products, be careful about how many debts you have.
- Types of credit: your credit score can be affected if you only have one type of credit product, such as one credit card. Different types of credit will actually serve to benefit you: credit card, auto loans, lines of credit, etc.
It’s important to be aware of what helps and hurts your score. Your payment history, debts, how much credit you use, the length of your credit history, the number of new credit accounts you take on or inquire about, and the mix of credit types in your name all inform your score. White recommends ordering a copy of your score (from consumer credit reporting agencies Equifax or Transunion) once a year; not only to keep yourself in check, but as a protective measure. [Genworth Financial]
It is free to get a copy of your own credit report, so you should check it annually for errors to ensure everything is correct. This will also give you an idea of how things are going year-to-year. If you’re interested in how to file complaints or errors, check the Financial Consumer Agency of Canada website.