All you need to know about credit score

In this article, I’ll explain what a credit score is, what affects your credit score, what advantages a high credit score gives you and what are the best practices you can use so you can improve your credit score.

First of all, I’d like to explain briefly what a credit report is. A credit report is simply a report of your credit history. It includes information about your credit cards and loans, such as when you opened an account, if you made your payments on time, if you missed payments, if you went over your credit limit and so on. The credit report also contains information on non-sufficient funds payments, bouncing cheques, bankruptcy, debts sent to collection agencies and fraud alerts. Your credit report also includes details on inquiries from lenders in the last three years. Watch till the end as I’ll be talking about inquiries in detail later in this video.

A credit report is used by lenders to decide whether or not to approve your application for credit.

Now back to our main topic: credit score. By definition (https://www.canada.ca/en/financial-consumer-agency/services/financial-toolkit/credit/credit-5/3.html), “a credit score is a number that expresses your credit information at one point of time”. Your credit score indicates the risk you represent to lenders, compared with other consumers, on a scale from 300 to 850 for the US, and a scale from 300 to 900 for Canada. Long story short, The higher your score is, the lower the risk you represent to lenders, and the higher the chance your credit request would be approved by the lender with a better rate.

This summarizes the advantages of a having a high credit score: higher chance for a credit card and loan approval, getting approved for higher credit limits, and lower interest rates on credit cards and loan.

Knowing how important a high credit score is, here are some important tips on how to improve your credit score:

1. Make all your payments on time: That includes credit cards, mortgage, car loan, utilities and all kinds of recurring bills payments. Always make your payments before the due date and never ever skip a payment. If, for some reason, you can’t pay your full statement balance, make sure to pay the minimum amount. This can be as low as $10 for a credit card statement.

2. Use a smaller percentage of your credit limit: try not to use more than 35% of your available credit on your credit cards. Using a bigger portion of your available credit can lower your credit score. For example, if you have two credit cards, one with a $6,000 limit, and one with $4,000, then your total credit limit is $10,000. 35% of $10,000 is $3,500 so as long as you spend less than $3,500 per month, you’ll have a higher credit score. I recommend having a higher credit limit and using less of it. If your bank ever offers you an increase of your credit limit, never say no, but be responsible and never increase your spendings just because you have a higher credit limit, so be wise and take advantage of a higher credit limit to increase your credit score, not increase your debt.

3. Have credit accounts open and in use for a longer time: the longer your credit history is, the higher your score can be. New credit accounts can lower your credit score. Consider keeping an old credit card open, even if you don’t use it, especially if you don’t pay any yearly fees. Lot of people apply for new credit cards just to take advantage of bonus points or a higher cash back rate, but what they don’t know is that a new credit account would definitely decrease their credit score.

4. Limit your hard hits: hard hits are credit checks that have an impact on your credit score. When you apply for a new credit card, a mortgage or a car loan, the bank or the lender will always pull your credit report from the credit bureau so they can decide whether or not to approve your application. These credit checks always affect your credit score. Therefore, minimize the number of times you apply for credit, and only apply for credit when you really need it. And if you’re shopping around for a mortgage or a car loan, get quotes from different lenders within a two-week time frame, because if your inquiries are within a two-week period, they will be treated as one inquiry and won’t hurt your credit score much. Every credit inquiry will show on your credit report, so keep in mind that, if lenders see too many inquiries on your credit report, they might refuse your credit application.

5. Have different types of credits: It’s always better for you if you have more than one credit card, a mortgage and a car loan. Remember, a longer credit history, on-time payments and less use of your available credit will all increase your credit score. Keep in mind that a mix of credit products can improve your credit score, but it can hurt you, so when you apply for a new credit, make sure you can afford it, because you might hurt your credit score if you borrow money that you can’t pay back.

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