Did you know that the average person only has a “fair” credit rating? While seemingly positive, this isn’t necessarily a good thing. A fair credit rating makes it harder for you to get loans from banks and other financial institutions.
A good credit rating can positively impact your finances in several ways, so it’s important to get on top of credit report and score.
But what exactly is a credit score? And how do you read a credit report?
Keep reading to find out.
What is A Credit Score?
A credit score is a three-digit number that gives you and credit bureaus an idea of how well you manage credit and debt. Low numbers indicate a bad credit history and the mismanagement of funds. Whereas a higher number shows banks and other institutions that you pay off your debts and manage your money well.
These debts are made up of car loans, mortgages, and credit cards.
This number differs between credit bureaus, but their premise is the same. Canada’s main bureaus are TransUnion and Equifax.
You’re probably wondering why this is important. Well, as mentioned, a good credit score can positively impact your life. The better your score, the more likely you are to get approved for any loan you may need to take out.
But banks and financial institutions aren’t the only ones who run credit checks. Plenty of employers and landlords do as well, as part of their vetting processes.
So, if you want that new car, house, or even that new job, it’s important to maintain a good credit score.
How To Read Your Credit Score
Reading your credit score for the first time can be confusing. But once you get the hang of it, it’s easy as pie.
Your credit report might look slightly different depending on which bureau you work with. Regardless, though, all credit reports have the information listed below.
Your personal information will probably be the very first thing you spot on your credit report. After your credit score, of course.
All the information listed in this section helps identify you and ensures no funny business is going on.
You’ll see a host of things, such as:
- Your full name
- Your birthdate
- Social Insurance Number
- Home addresses – current and past
- Contact details
When reading your report, always make sure the information in this section is 100% accurate.
Credit History and Accounts
Next up is a list of your open accounts and your credit history. This section often makes up the largest portion of your credit report, especially if you’ve had accounts open for a very long time.
You’ll see a list of every single account you’ve ever opened and all the necessary information. This section is the most important, as this dictates your credit score. Because of this, you need to make sure every bit of information in this section is accurate.
Under each account, specific details are listed, such as the account holder and the credit provider. It also indicates the initial loan amount, credit limit, and how much of the credit you’ve used.
You’ll also see the account’s opening and closing dates (if applicable), along with its status. The status could be, Open, Closed, Paid, Foreclosed, Transferred, or Charged Off.
That’s not all though. It also shows the payment history of each account. This indicates all your on-time payments, late payments, and even missed payments.
Do you see why this is the biggest and most important section of your credit report?
You might spot this section within the Accounts section, or on its own. It holds all the information on any accounts in bad standing.
An account in bad standing has several late payments or payments that are well past due. Sometimes, if the debts haven’t been paid off after a certain amount of time, they’re considered delinquent. If this happens, they’re often sent to a collection agency.
Any information in this section can negatively impact your credit score and hurt your chances of getting future loans.
This next part lists anytime someone has run a credit check on you. This usually occurs when you’re applying to open new lines of credit or want to open a new account. This is known as a hard inquiry.
Each time someone checks your report, your score may dip slightly. So be wary of applying for multiple lines of credit in one go.
But don’t worry if you regularly check your report. This is a soft inquiry, and it won’t affect your credit score in the slightest. Another example of a soft inquiry is if any banks check your score for any promotional offer.
This section needs to be blank if you want a good credit score.
It lists any financial activity that goes onto your public records, like judgments and bankruptcies. While they don’t stay on your record forever, they are kept there for seven to ten years.
While the chances of a mistake are low, you should always double-check all the information in this section. You want to make sure that when the time comes, all negative records are scrubbed from your record.
How Credit Scores Are Calculated
Now that you know how to read your credit score, let’s get into the numbers.
As mentioned, several factors affect your credit score. Credit bureaus consider your payment history and your credit utilization when calculating your score. They also consider:
- How old your accounts are
- Whether or not you have a mix of credit
- The number of inquiries
- If you have any information in the Public Records section
You’ll have a good credit score if you pay your accounts on time and in full each month and if you haven’t used up your credit utilization. Having a decent mix of credit, such as a credit card and a car loan or mortgage, increases your credit score too.
Oddly enough, the older your accounts are, the better. Old accounts give a good indication of how well you manage your debt.
If there are several recent hard inquiries on your report, your score may not be as high as you hoped. Having any sort of information in the Public Records section will also bring your score way down.
A Good Credit Score is…
You’re probably wondering what a credit score looks like. Your score will differ from bureau to bureau, but the higher the number, the better your score is.
Despite this, both TransUnion and Equifax have a score range of 300-900. And while your score might differ between the two, the Canadian government has a predetermined ranking system:
- 300-559 = Poor
- 560-659 = Fair
- 660-724 = Good
- 725-759 = Very Good
- 760-900 = Excellent
Thanks to this ranking system, getting a good, or even excellent score isn’t a major challenge. For the go-getters out there, know that it’s extremely rare to get a perfect 900 score. But not impossible.
Improving Your Credit Score
Seeing a Poor or Fair credit score can be disheartening. But there are several ways you can improve your credit score. By changing a few financial habits and behaviors, you can quickly increase your score.
Your payment history makes up almost 40% of your credit score. So, the very first thing you need to do is pay your bills before or on the due date. Late payments can negatively affect your credit score.
Reduce Your Credit Utilization
The biggest credit score determiner is your credit utilization. For a good score, TransUnion recommends keeping your utilization below 35%. The best way to keep your utilization low is by being mindful of what you buy on credit. Always aim to live within your means.
Try not to max out your card and try to pay the full outstanding amount each month.
Keep Your Accounts Open
As mentioned, the longer your accounts stay open, the better. While this might seem odd and counterproductive, your credit history makes up 15% of your score. Having a long credit history shows lenders how you manage your credit over a long period.
Diversify Your Credit Portfolio
People with good credit scores often have a healthy mix of credit. This means they have credit cards and personal loans. Open accounts, such as cellphone contracts, also help diversify your portfolio.
It can be a bit challenging to open new accounts with a low credit score but building your credit score takes time. Try some of the other tips, and when your score has increased, look into opening other lines of credit.
Credit Score Readings Made Easy
Knowing how to read your credit report gives you a better understanding of your credit score and everything that may impact it. You can now make better, healthier financial decisions that better your credit score.
Wanting more information on how to improve your financial health? Take a look at our blog!