How to Understand Your Credit Score and Credit Report

What does building credit mean?

The first time you get a credit card, take out a personal or car loan, apply for a line of credit, or finance a retail purchase, you’re building your credit. When you start borrowing, your credit history is established and you then begin to build your credit rating.

 The main factors that influence your credit score

Information about your borrowing history, such as whether you pay on time or make additional payments, is sent to one or both of the Canadian credit agencies (TransUnion and Equifax) and constitutes your credit report.

 Lenders can track how often you make payments on time, and even if you make extra payments. To maintain a good credit score, it is important to limit late payments.

 Credit usage is the ratio of credit you are using to your limit. It is recommended that you keep credit utilization below 25% (for example, having a balance of $250 or less on a credit card with a credit limit of $1,000).

 Your credit history dates back to the first time you owned a credit card, took out a loan, or obtained any other type of credit. The longer your credit history, the more positive your credit report will be.

Credit applications  : Too many credit applications can have a negative impact on your credit rating. It is therefore best to keep the frequency of your credit checks to a minimum.

The types of accounts that make up your credit report (credit cards, student loans, car loans, etc.) make up your credit mix.

Each time you submit a loan application, your credit report is updated. Your report also includes public information (eg, bankruptcy).

Understanding the Credit Score Range

Your credit report includes your credit rating. Most lending and finance companies use credit scores and information from credit reporting agencies to determine the level of credit risk of a person and, using that information, the interest rate that person is eligible for. Generally, the higher the credit rating, the better the credit history, and the more responsible behaviors the person has in the past, the more likely they are to repay their loan and meet payment deadlines.

What is a “good” credit rating?

With an excellent (760 and above) or very good (725 to 759) credit score, you will be approved for most loans and credit cards, at the lowest interest rates. A low credit score (300 to 559) will likely cause problems when applying for credit: options may be very limited. Then there are the credit scores that fall in the middle of this range: fair (560 to 659) and good (660 to 724). However, they may not qualify with a bank and will likely have to pay a higher interest rate Do not worry, it can always be improved. In the next section, we will teach you how to restore your credit report.

How to Improve Your Credit Score:

Now that you understand what influences your credit report and credit score, here are five steps to help you restore your credit (or establish it if it’s new to you):

1. Make your payments on time, all the time. One or two missed payments won’t hurt your credit rating overnight. However, multiple missed payments can negatively affect your credit rating over time. The best way to make your payments on time?

Make sure you have the funds to make your mortgage or loan payments. If your budget doesn’t allow you to make these payments, ask your lender to create a more reasonable repayment schedule.

Never spend more on a credit card than you can afford.

Set up automated payments and never worry about forgetting a payment on your loan or credit card.

2. Reduce your use of credit. It’s not a good idea to go over the limit on your credit card or line of credit on a regular basis. Instead, use less than 25% of your credit limit. Going back to our previous example, if your credit limit is $1,000, try not to keep a balance above $250. It may even be a good idea to increase your credit limit (if that works for you) to keep credit utilization below 25%.

3. Haven’t established your credit? Do it as soon as possible. If you’re young, you might think you still have years before you need to take out a car loan or mortgage. But to have access to the lowest interest rates when you need to apply for a loan, it is important to establish your credit quickly. Look for a student credit card or a secured credit card to start building your credit report. And remember to always make your payments on time

4. Only ask for credit if you need it, and know when a company does a registered credit check. People often don’t realize it, but when applying for an apartment rental, starting a new job, or changing phone providers, they may be subject to a credit check. Multiple inquiries will hurt your credit rating, so always ask if a company will do a recorded credit inquiry before signing.

5. Track your credit. Sign up for a free credit monitoring service to track your progress – it will motivate you. Plus, it can help you recognize fraudulent activity on your credit report that could put you at risk for identity theft.

Reminder: Your credit rating will obviously change over time. If you use your credit and repay your debts, your credit rating could go up (that’s why we talk about building your credit). However, if you are having trouble managing your credit, your credit score could drop.