Financial Friday 177 : Managing Your Credit Score Can Lead to Big Savings
If you are looking for ways to better your financial situation, one of the first tasks you should be focusing on is how to build your credit score. Your credit score is a measure of your demonstrated ability to meet your loan commitments and other bills in a timely manner. It is one of the key metrics to measure your financial progress. The higher your score, the more likely a lender is to loan you money, and the lower the interest rate you will receive.
What is a good credit score?
In Canada, your credit score is derived from a credit report issued by either TransUnion or Equifax and the number ranges from 300 to 900. The Canadian average is around 650. Good credit scores over 750 offer a higher chance of loan approval, greater borrowing limits, and lower interest rates and insurance premiums. If you want to get the lowest advertised mortgage rates you are going to need a top-notch credit score. At the other end of the scale, a score of under 600 will make it very difficult to get a mortgage from a bank.
The potential savings from a good credit score are huge on big-ticket items. A 1% reduction in your mortgage rate will easily save you tens of thousands of dollars. Vehicle loans offer even greater variation in interest rates and a poor credit score will take a lot more money out of your pocket every payment.
How to check your credit score?
You can check and monitor your actual credit score from a number of different sources — banks, finance companies, credit unions, and specialty “credit score providers” can all provide your score. They often include it free if you are an existing customer or if you are willing to register and provide an email address.
Who looks at your credit score?
These days, credit scores are used for a lot more than deciding if you qualify for a loan. Employers may request a background check and a credit check before they formally offer employment. Landlords will often ask for a credit check before offering you a lease and even utility/service providers may want to review your credit history.
If you have your eye on the perks that go with obtaining one of those premium credit cards or are looking to increase the limit on your existing card, obtain a business loan, or secure a personal line of credit — your credit score is going to be a big factor in whether or not you are successful.
5 factors affect your credit score:
1. Payment history (35%)
2. Credit utilization (30%)
3. Length of credit history (15%)
4. Credit mix (10%)
5. Credit application frequency (10%)
How do I fix my credit score?
Credit scores are continuously evaluated and adjusted. If you have "errored" in the past, rest assured that the damage is not permanent! There are ways to improve your credit score over time if you use credit responsibly, but it is much easier to avoid mistakes that lower your score in the first place.
Check your credit score regularly!
If you are looking for some simple financial advice that pays huge dividends — check your credit score on a regular basis. It will allow you to track fluctuations and overall improvement, detect errors, and prevent identity fraud. It's a worthwhile exercise, even if you have no debt! Checking your own score does not form part of your credit application history and does not affect your credit score.
There is a lot of confusion and plenty of urban myths when it comes to credit scores, but the worst mistake you can make is to ignore your credit score. Sooner or later you are going to need it and the better it is, the more favourable the outcome is going to be. If you want to learn more about managing your credit score, make sure to join our Head of Financial Coaching Alanna Abramsky on October 17 for a free webinar on understanding credit
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