Have you ever been ready and willing to make a HUGE financial commitment, only to be told that your financial history is screwing you over? Or maybe you’ve combed through all the financial impacts that something will have on your life, only to be shocked by a higher interest rate that derails all of your plans?
THIS is why it’s important to stay on top of your credit. Don’t be blindsided!
What IS a Credit Score?
According to Investopedia (very official!):
A credit score is a statistical number that evaluates a consumer's creditworthiness and is based on credit history. Lenders use credit scores to evaluate the probability that an individual will repay his or her debts. A person's credit score ranges from 300 to 850, and the higher the score, the more financially trustworthy a person is considered to be.
Note: Canadian Credit Scores can actually go up as high as 900!
Basically, it’s a number that tells the people lending you money (like a car company, or a bank) how likely you are to pay the money back.
How does it affect your life?
If you are ever thinking of borrowing money (which most people do!) then this is a really important number to keep track of. If you are mindful and responsible with your credit, you can be rewarded with lower interest rates, and higher borrowing amounts.
For example, let’s say you want to buy a car:
You have a downpayment of $2,000 but the car is $27,000 so you need to borrow $25,000 from the car retailer.
Let’s say that there is a promotion going on that gives you a 0% interest rate if you pay the car back in 10 years.
According to your cash flow, you can project that you will be able to comply with this requirement. You decide that you want to buy the car.
HOWEVER, once you visit the dealership, you find out that this interest rate is only available to those who have ‘high credit’.
If the company checks your credit, and your number is too low, you would not be eligible for the 0% promotional rate, and be forced to take the regular interest rate of 5% instead.
This means, that EVEN THOUGH you’re paying off the SAME car, in the SAME time period, YOU are required to pay - basically for the privilege of borrowing that money - as opposed to someone who has good credit, that can just pay off the car on it’s own. And that’s assuming you have a good enough score to even borrow the money at all.
Now, of course that’s a very simplified example, but you can see how it definitely costs you money in the long run to have bad credit. And none of us wants to pay more than we need to on anything we purchase!
How to Check Your Credit:
The company that keeps track of your credit is something called a Credit Reporting Agency or a Credit Bureau.
Note: Called Consumer Reporting Agency in the States
In both countries, these companies are required to allow you to check your official score for free once per year.
It’s important to check those ratings from those companies specifically because that is the most accurate representation of what your credit actually IS. But, as I said, these reports are only offered FOR FREE once per year.
So, after that yearly ‘official’ check, how do you keep track of your credit on the regular?
These companies will keep track of your credit scores for you, and can send you monthly, or quarterly updates on the changes of your accounts. This is extremely important, because you’ll want to be monitoring your credit regularly for errors.
Why Monitor Your Credit?
Your credit score isn’t just a number, it’s a report on all of the credit has been taken out in your name. If your identity is stolen, you’ll be able to catch it pretty quickly because you will see there has been a mistake on your credit report.
There can also be mistakes from other companies who report to these agencies.
For example, if you have a loan, and ALWAYS pay your bills on time, but your credit report comes in and says that you haven’t been paying, or that you missed one, then that can put a big dent in your score. If you’re only checking your credit once per year, or, not checking it at all, you can easily miss a mistake like this. It could be months, or even years until you noticed and by then it would have disastrous lasting effects on your score. Do yourself a favour, and check your credit BEFORE something like this happens. Trying to fix a mistake is much easier when you’re doing it right away, instead of trying to back track.
Using Credit to Our Advantage:
By regularly checking and taking care of our credit, we can keep track of our identity, understand our borrowing capacity, and even sort of game the system when we’re about to make larger purchases.
Let’s think back to that first example I gave about buying a car. If you had checked your credit prior to going into the dealership, you would have known that your score made you ineligible for that 0% offer. Instead of being faced with a situation where you were forced or pressured into a decision, you’d have a better idea of how to prepare. Maybe you’d need to rework something in your budget to afford the new higher payments, or you could wait to purchase, and try to get that score higher before you went back in to talk to the salesman.
Any preparation that you can have gives you an ADVANTAGE and can save yourself some serious cash!
Let me know in the comments down below how YOU keep track of your credit score! Has there ever been anything that surprised you on the report?
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