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Get your credit score.
What is the credit score and how to improve that

Your credit score

Your credit score is a three-digit number that comes from the information in your credit report. It shows how well you manage credit and how risky it would be for a lender to lend you money.

Your credit score is calculated using a formula based on your credit report.

Note that:

  • you get points for actions that show you use credit responsibly
  • you lose points for things that show you have difficulty managing credit

Your credit score will change over time as your credit report is updated.

How a credit score is calculated

It's not possible to know exactly how many points your score will go up or down based on the actions you take. Credit bureaus and lenders don't share the actual formulas they use to calculate credit scores.

Factors that may affect your credit score include:

  • how long you've had credit
  • if you carry a balance on your credit cards
  • if you regularly miss payments
  • the amount of your outstanding debts
  • being close to your credit limit
  • the number of times you try to get more credit
  • the types of credit you're using
  • if your debts have been sent to a collection agency
  • any record of insolvency or bankruptcy

Lenders set their own guidelines as to the minimum credit score you need for them to lend you money.

If you have a good credit score, you may be able to negotiate lower interest rates. However, when you order your credit score, it may not be the same as a score produced for a lender. This is because a lender may put more weight on certain information when calculating your credit score.

Who creates your credit report and credit score

There are two main credit bureaus in Canada:

  • Equifax
  • TransUnion

These are private companies that collect, store and share information about how you use credit.

Equifax or TransUnion only collect information from creditors about your financial experiences in Canada.

Some financial institutions may be willing to recognize a credit history outside Canada if you ask them. This may involve extra steps. For example, you may request a copy of your credit report in the other country and meet with your local branch officer.

Get your credit score

A lender will use your credit score to determine if they will lend you money and how much interest they will charge you to borrow it. Your credit score is a number calculated from the information in your credit report. It shows the risk you represent to a lender compared to other consumers.

Knowing your credit score before a major purchase, such as a car or a home, may help you to negotiate lower interest rates.

You usually need to pay a fee when you order your credit score online from the two credit bureaus.

Some companies offer to provide your credit score for free. Others may ask you to sign up for a paid service to see your score.

Make sure you do your research before providing a company with your information. Carefully read the terms of use and privacy policy to know how your personal information will be used and stored. For example, find out if your information will be sold to a third party. This could result in you receiving unexpected offers for products and services. Fraudsters may also offer free credit scores in an attempt to get you to share your personal and financial information.

Always check to see if a website is secured before providing any of your personal information. A secured website will start with “https” instead of “http”.

 

Improving your credit score

Monitor your payment history

Your payment history is the most important factor for your credit score.

To improve your payment history:

  • always make your payments on time
  • 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

Don't go over your credit limit. Use only a percentage of your available credit. Try to use less than 35% of your available credit.

If you use a lot of your available credit, lenders see you as a greater risk. This is the case even if you pay your balance in full by the due date.

To figure out how to best use your available credit, add up the credit limits for all your credit products.

This includes:

  • credit cards
  • lines of credit
  • loans

For example, if you have a credit card with a limit of $5,000 and a line of credit with a limit of $10,000, your available credit is $15,000. Try not to borrow more than $5,250 at any time. This is 35% of $15,000.

Increase length of 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.

If you transfer an older account to a new account, the new account will be considered new credit.

For example, some credit cards offer you a low introductory interest rate on your current balance if you transfer it to a new product. The new account you transfer the balance to would be 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. Make sure there is no fee if the account is open but you don't use it. Check your credit agreement to find out if there is a fee.

Limit your number of credit applications or credit checks

It's normal and expected to seek credit every so often. When lenders and others ask a credit bureau for your credit report, it's recorded as an inquiry.

If there are too many credit checks on your report, lenders may think you're:

  • urgently trying to get credit
  • trying to live beyond your means

“Hard hits” versus “soft hits”

“Hard hits” are credit checks that appear on your credit report and count toward your credit score. Anyone who views your credit report will see these inquiries.

Examples of hard hits include:

  • an application for a credit card
  • some rental applications
  • some employment applications

“Soft hits” are credit checks that appear on your credit report but only you can see them. These credit checks don't affect your credit score in any way.

Examples of soft hits include:

  • requesting your own credit report
  • businesses asking for your credit report to update their records about an existing account you have with them

How to control the number of credit checks

To control the number of credit checks on your report:

  • limit the number of times you apply for credit
  • get your quotes from different lenders within a two-week period when shopping around for a car or a mortgage so that they are combined and treated as a single inquiry for your credit score
  • apply for credit only when you really need it

Use different types of credit

Your score may be lower if you only have one type of credit product, such as a credit card.

It's better to have a mix of different types of credit, such as:

  • a credit card
  • a car loan
  • a line of credit

A mix of credit products could improve your credit score, but make sure you can pay back any money you borrow. Otherwise, you could end up hurting your score by taking on too much debt.

 

Reference: www.canada.ca


Marcy Mivehchian Marcy Mivehchian 09/24/2019
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