How to understand your credit rating and credit score

How to understand your credit rating and credit score

Unless you can afford to pay for everything in cash, you’ll need to borrow money at some point. That’s when a good credit score comes in handy. By maintaining a good credit score, you’ll pay less in interest and have more money to contribute to your child’s RESP.

Your credit score is made up of three main parts: credit history, credit report and credit score. Your credit history is like your resumé; it has a history of any time you’ve borrowed money. Your credit report is a yearly recap of your credit history. Your credit score is the number that lenders care so much about. Credit scores usually fall between 300 (lowest) and 900 (highest).


Understanding your credit score

Your credit score is made up of five main factors you’ll want to understand in order to maximize it.

1. Payment history

Your payment history has the biggest influence on your overall credit score. Paying any money you’ve borrowed on time can go a long way in maintaining a good credit score. However, missing payments or paying them late can hurt it. If you do it too often, it can cause your credit score to plummet. By making at least the minimum payment, you can protect your credit score.

2. Total available credit

Your total available credit is as the name suggests how much credit you have at your disposal. To calculate your total available credit, take your total credit limits of all your credit accounts minus the total of all your outstanding balances.

Ideally, you’ll want to be using 35 percent or less of your total available credit. Using 35 percent or less of your total available credit shouldn’t impact your credit score. However, when you start using 50 percent or more, that’s when it can lead to your credit score dropping, as lenders tend to worry that you’re getting in over your head.

3. How many credit inquiries

The number of credit inquiries can also impact your credit score. When it comes to credit inquiries, not all credit inquiries are created equal.

There are two types of credit inquiries: soft and hard. Soft inquiries don’t affect your credit score like checking your own credit. Meanwhile, hard inquiries like applying for a mortgage or credit card do. You want to limit the number of hard inquiries to protect your credit score. You can do that by only applying for credit that you truly intend to use.

4. Credit types

Having just one type of credit like a credit card can hurt your credit score. You want to have a mix of credit. Besides just a credit card, try to have at least one other credit type like a mortgage, line of credit or loan. Just make sure you use any credit that you take out responsibly, otherwise it could hurt, not help your credit score.

5. Length of credit history

Before a lender will grant you credit, they want to see that you have a track record of using credit in a responsible way. Your credit history goes a long way in demonstrating to a lender you can use credit responsibly over the long-term. The simplest ways you can demonstrate a good credit history is by always making payments on time.

Sometimes people close accounts because they’re no longer using them. However, as long as you’re not paying an annual fee, it’s worthwhile to keep a credit account like a credit card open if you’ve had it for a long time, otherwise you could cause your credit score to fall if you close it.