Personal finance

Personal finance advice: how can I improve my credit score?

#MakeItMakeSense is a series from The Star that breaks down personal finance issues to help young Canadians gain more confidence and understanding when it comes to financial literacy.

Maintaining and understanding your credit score can be overwhelming to say the least, and even the most knowledgeable people make simple mistakes that can negatively impact their credit score.

Credit, like our money expert Jessica Moorhouse explained, is the ability to borrow money from a lender so that you can access goods and services now, but pay for them at a later date, plus interest.

When it comes to credit scores, Moorhouse said that while many people obsess over the specific number, all that matters is that you’ve passed a certain threshold.

For example, at one of Canada’s two major credit bureaus, scores above 660 are considered good, above 725 very good, above 760 are excellent, Moorhouse noted. On the other hand, scores above 650 are considered good, above 720 very good, and above 800 excellent.

“The goal is to be in the ballpark at least, but ideally very good or excellent,” she said.

“A credit score is just an indication to a lender of, ‘Is this person reputable with credit?’ “Can I trust them to repay what they borrowed?”

So how can we work to improve our credit scores? We asked Moorhouse for their tips and #MakeItMakeSense.

How can I be more responsible with credit payments?

The two main Credit bureaus in Canada are TransUnion and Equifax. Not only do the two bureaus have differences in credit scoring models and calculations, lenders often only report to one or the other. For example, your credit card may fall under one, but your student loan under another.

With that in mind, Moorhouse advised people to keep an eye out and look for indications of why their score might be lower than expected, or if there are any errors.

“If your credit rating isn’t what you want it to be, you can make changes to change that in the future. (Credit scores) are a snapshot in time of how you’ve been with credit in the past,” Moorhouse said.

Moorhouse stressed the importance of always making payments on time. Even if you can’t afford to pay full balance right away, it is better to pay the minimum than not to pay at all.

She added if people are having trouble paying a bill, they can also contact their lender to see if they can work out a different payment plan that fits their situation and doesn’t negatively impact their credit score at the same time. weather.

Why is credit history important?

The longer you’ve had credit, the better your score will be, as long as you’re responsible for it, Moorhouse explained.

She has had a credit card for more than 15 years and generally aims to make a purchase each year to keep it.

“Think about it from a lender’s perspective. You are looking at a loan applicant who has 15 years of credit and another who is only two years old. Who do you think is going to be the biggest risk? The one who couldn’t have had so much history to show? Or the one who’s been doing it for 15 years?

Moorhouse added that if there are people who want to switch credit cards to, for example, avoid an annual fee, they can contact their credit card company directly and see if there are options to keep their history. credit while switching to a new card.

What is a hard credit check versus a soft credit check?

Moorhouse said a key to recognizing and better understanding your credit history is knowing the difference between a hard credit check and a soft credit check.

“A hard hit means it will negatively impact your credit score. It will lower it somewhat because it was a difficult extraction of your information,” she said, adding that people allow lenders to perform this type of verification.

Hard knocks include loan or credit card applications, as well as rental and employment applications where lenders pull your credit before approving your loan application and determining what terms they can present to you.

In comparison, soft credit checks won’t show up on your reports or negatively impact your credit score. According to Trans Union a soft credit check “is a more routine check that can be done without your permission.”

“If you check your credit score, it’s considered a low blow. Companies that request a credit report to update their records are also considered a weak hit,” Moorhouse said.

What happens if I fill out several credit applications at the same time?

Moorhouse said it’s not a good idea to fill out multiple credit applications in one short period of time, such as opening several credit cards for incentives and then closing them soon after.

Indeed, for lenders, it happens when you’re overburdened or in a rush to access credit, which could lead them to assume you don’t have enough savings, she said.

“In general, it’s not a good idea to apply for a car loan and five credit cards at the same counter, because lenders will say, ‘What’s going on?’ and that will also reflect in your score. credit,” she said.

“In other words, you don’t want to look like you’re in desperate need of credit, because that might indicate you won’t pay it back like you promised.”

If you don’t get approved for credit, applying for multiple types of credit can actually hurt your credit because each application is considered a rigorous credit check and will therefore lower your score, she explained.

“That’s why it’s important to review your credit reports and correct any errors and get a good idea of ​​your credit scores before applying for credit and risking rejection,” he said. she declared.

“In other words, if you think you won’t be approved, wait, improve your credit scores, and then apply.”

Have a question or scenario you’d like to see covered? Contact Madi by email [email protected] and we’re going to #MakeItMakeSense.

Jessica Moorhouse is a Canada® Certified Financial Advisor, host of the More Money podcast, and founder of financial education company MoorMoney Media Inc.