So you know what your credit score is. But what does that MEAN?! Is it good? Is it bad? What’s that magic number you’re going to need to secure that car loan?! AND, what happens if your ‘magic number’, isn’t so magic? How do you change or improve your score?
If you’re asking yourself any of these questions, keep reading! I’m going to teach you exactly what a ‘good’ or ‘bad’ credit score is, in BOTH Canada AND the US and how you can change or improve your score!
Before we start, if you missed the last post, I’m going to link it here: https://www.readysetlifecoach.com/blog/how-to-find-out-your-credit-score
I suggest that you also read this too! That’s going to be really helpful in figuring out how the information in this post can relate to your personal situation!
What is Considered “Good Credit”:
Obviously, it will depend on the company you’re asking to loan from where the line is between ‘good’ or ‘bad’ credit. However, in general the higher your number the better your credit is.
If we look at Equifax (remember from the last post I said that was one of the top ‘official’ credit bureau’s)
They say:
Anything from 660 - 724 is considered ‘Good’ Credit.
Anything from 725 - 759 is considered ‘Very Good’ Credit
Anything from 760 and above is considered ‘Excellent’ Credit
*Remember, in the US credit scores only go up to 850, but in Canada, scores can be as high at 900!
This means that anything BELOW 660 is considered ‘bad’ credit.
What if my credit score is lower than 660?
Now, if you have already checked your credit and find yourself in that zone, DON’T freak out yet!
There are definitely things you can do to improve that number. And it really does depend on where you are in that ‘lower than 660’ range.
For example, from 560 - 660, you might actually be ok for still getting a loan. You just might not have great loan terms, or have a lot of wiggle room on what they’re willing to give you.
However, if you’re on that lower end, 300-560 range, THAT’s where you’re going to run into some problems.
So, if you DO find yourself here, how do you turn it around? Before we get into the specifics, let’s take a look at HOW these scores are calculated.
How is your credit score calculated?
No one knows with 100% certainty how credit scores are calculated.
The bureau’s don’t release their exact formulas. If they did, it would be way too easy to cheat the system.
However, we DO know the factors in which they’re looking at, and have a rough idea of how much each of them matter.
Credit History:
Credit history is a big one.
Lenders, (the people who you’re borrowing the money from) want to know that you have a long history of properly repaying credit. So they know that it’s more likely that you’re going to repay theirs.
The longer your accounts have been opened, the better! If you DON’T have a credit history, it can be pretty difficult to get approved for credit.
It’s sort of like the chicken/egg scenario, or applying for one of those ‘entry level’ jobs that require 3 years of experience. You have to have credit to get credit. It can be pretty frustrating.
Hopefully, you got some sort of credit card in college that you can start with,
BUT, if you don’t have any credit history, start one. You have to be able to show that you can pay something off responsibly and the quicker you start, the better off you’ll be!
Payment History:
Along with credit history, payment history is also a pretty important factor of your credit score.
Again, the lender wants to know that you are responsible with what you’re given, and stick to the agreement terms.
ie. paying your loans, in the amount that is satisfactory, and on time!
If you pull your report, and you find you’ve messed up a few times on payments, it’s ok. You can’t fix the past, BUT, you CAN be better moving forward.
So take a few months, and be CONSISTENT with your debt payments.
The further away you can get yourself from that ‘old irresponsible’ you, the more you’ll be able to prove that you’re ‘reformed’ and your credit will improve.
So, don’t miss a payment again and you should be ok.
Credit Usage:
Another thing that’s important in your score is Credit Usage.
Credit usage is basically how much of that debt you have, or the ratio of the available amount and how much of that you are using.
It’s important to have a credit history, but if you have too many open accounts with high balances, that could affect you negatively.
A good rule of thumb is to make sure you’re keeping your credit usage at, or below 30% of your available credit.
So, if you have a credit card with a limit of $2,500 make sure there’s no more than a $750 balance on it at a time.
Obviously, the lower the balance, the better it is: if you can pay off your credit right away, in full, that’s the best case scenario!
But if you are having trouble, really try and keep it as close to that 30% as possible.
Another trick that people use for this, is to say YES to those credit increases that the banks will try and sell you on.
Now, obviously you have to be VERY careful with this. If you are NOT a good credit user (and you KNOW if you’re not) then this trick isn’t for you.
But if you are pretty responsible with your credit cards, say yes to those offers.
Don’t be afraid to have more credit because there’s no harm in having a higher limit on your card. You do NOT need to use it.
But it does make that percentage threshold higher and will add to your credit score.
Your Credit Applications:
There are two types of credit checks, a ‘hard credit check’ and a ‘soft credit check’. If you’re just checking your score for your own interest, or maybe you’re getting a background check from an employer that’s a SOFT credit check. This type of check does not affect your credit score. A HARD credit check happens when you’re actually asking to borrow money. This DOES appear on your report, and actually will put your credit score down a few points for a little while. Lenders will look at the number of HARD credit checks on your account because that can be an indication of whether you are applying just for what you need, or are maybe in a bad financial spot and applying for too much credit.
Types of Debt:
The type of credit that you have also affects your score. If you have a mix of different types of debts, say, a credit card, a house, and a line of credit, then that can show companies that you are able to balance and manage different types of payments at once. (which is a good thing!) It’s not looked down upon if you DON’T have different types of debt, but it does add to your score if you do have differing types.
How to Improve Your Credit Score:
If you want to improve your score, try looking at all of the factors I just mentioned. Figure out where your weakest points are, and work on improving those first. That being said, all of these factors contribute differently to your score, so make sure you also are taking a look at which parts that the credit bureau’s keep in priority.
Let me explain what I mean:
Credit Bureaus calculate your score using 2 main formulas: the VantageScore, and the FICO score. The formula that the credit bureau chooses to use, will change how much each of those factors I mentioned matters.
Here is a breakdown of the importance of each factor using each formula:
For the FICO Scoring:
Payment History: 35%
How Much You Owe: 30%
Length of Credit History: 15%
New Credit Applications: 10%
Types of Credit: 10%
For VantageScoring:
Payment history: extremely influential
Age and type of credit: highly influential
Percentage of credit limit used: highly influential
Total balances and debt: moderately influential
Recent credit behaviour and inquiries: less influential
Available credit: less influential
*Most of the credit bureau’s use the FICO formula, so I’d concentrate on that one.
However, the most important part of your credit score no matter which formula is being used is your payment history.
This proves that you can be responsible with your money. If you have a bad credit score, work on building this first.
Always always pay SOMETHING on your credit cards. If you can’t make minimum payments, call your credit or loan company.
Often, they’re willing to work with you on some type of modified plan, they want to see that you’re trying. AND, make sure you call them if you ever DO miss a payment.
If you have always been really great with your payments and mess up once, see if you can get it reversed!
You don’t want that record on your credit, and if you’re a loyal customer the companies are often willing to do this once or twice which can make a huge difference for you!
Let me know in the comments down below, do you think YOUR credit score is good? Does a credit score matter to you?