Woman thinking about how she can improve her credit score

Credit Scores 101: Give yourself some credit

Like it or not, credit is an important tool in our everyday financial life. We need credit to get a mobile phone plan, rent an apartment, get a mortgage and pay off big purchases over time.

Anyone who’s ever used credit with a major or mainstream company has a credit report, whether they’re aware of it or not. Lenders use your credit report to determine your credit score – a number between 300 and 900 – and decide whether to lend you money and how much they should charge you for it.

The more you know about credit, the easier it will be to maintain a good credit score and use your credit when you need it. The key to maintaining a good credit score is to pay off your debts when they’re due (or before!). That means always having enough money in your bank account to cover automated deductions, such as car loan payments or insurance costs, and paying your credit card and phone bills on time. Also, don’t be fooled by your credit card company’s suggestion that you pay only your minimum balance – this can have a negative effect on your creditworthiness. As well, if you need to apply for more than one kind of credit (bank credit card and a retailer credit card, or a line or credit and a car loan), don’t do it all at once. Even just requesting too much credit too quickly can flag you as a poor risk.

First, let’s get a few things straight. A credit report is not the same as a credit score.

  • A credit report is a summary of your credit history and is created as lenders send information about your accounts to credit bureaus, such as Equifax, TransUnion and Experian. In some jurisdictions, a company needs your consent to access your credit report, in others, they don’t. Your credit report can be accessed by credit card companies, car leasing companies, retailers, mobile phone companies, insurance companies, governments, employers and landlords. Here’s a Canadian sample credit report and a U.S. sample credit report.
  • A credit score is a number, calculated by credit bureaus, using a person’s credit report. Credit bureaus don’t share their formula for creating a credit score, and it can differ slightly between credit bureaus. Your credit score will change over time, as your credit report changes. Take a look at a sample credit score.

You can request your credit report from a credit bureau, and usually you can request one for free, if sent to you by mail. Some agencies charge money to make a credit report immediately available online. They may also charge to disclose your credit score. In general, a score above 700 is considered good, and a score above 800 is excellent. People with good or excellent credit scores might be able to negotiate a lower-than-average interest rate for a mortgage or a car loan.

Although credit score formulas are not available to the public, we know what factors go into making the formulas. They include:

  • how long you’ve had credit
  • whether you carry a balance on your credit cards
  • the amount of your outstanding debts
  • how close to your credit limit your credit card is
  • the number of times you’ve applied to increase your credit
  • whether your debts have been sent to a collection agency
  • insolvency or bankruptcy records.

Once you know your credit score, and you want to improve it, you’ll have to focus on one or more of the factors listed above. You can’t change how long you’ve had credit (someone who applied for their first credit card or student loan at 18 will have a more robust credit history than someone who first applied for credit at age 25), but you can change whether or not you pay off your credit cards every month, how much you owe and how close to your credit limit you are. Try to improve these aspects of your financial life and then, after three or four months, check your report or score again.

It’s important to know that it usually takes anywhere between 30 to 90 days for a credit report to be updated, so even if you pay off your credit card today, that won’t be reflected in your credit score right away. Also, every time you or a lender makes an inquiry about your credit, it’s noted in your report. If there are too many inquiries, it can have a negative effect on your credit score because it can look like you’re trying to access credit too frequently and might be living beyond your means.

Finally, it can be difficult to have your credit report from one country recognized in another country. So if, for instance, you move from London to Boston, you might have trouble getting a credit card or a mortgage in your new home because you haven’t proven your creditworthiness locally. Your financial institution can usually help you find ways around this, so try to work with them to make your credit work for you.

Disclaimer: Foresters Financial accepts no responsibility for the use and/or reliance on the information above.

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Nancy Carr

Nancy Carr lives and works in Toronto as a freelance writer and editor. She’s a former business reporter who enjoys writing about personal finance and real estate, as well as health, travel and family matters. You can reach her on Twitter (@NancyCarrComms) or LinkedIn.