With nearly twice as many credit cards as people, you would assume Canadians have great credit, right? Currently, the average credit score in Canada sits at around 650, which could use some serious improvement.
Well, there are ways to build your credit without harming you financially, but it all starts with one question; why? Fortunately, we’re here to answer all your questions about credit scores.
So, why is your credit score important, and what can you do to improve it? Let’s find out.
Why Is Your Credit Score Important?
First, and most importantly, a positive credit score offers peace of mind. With poor credit, you’ll be more limited than you think. Here’s why.
When it comes to moving up in the world, you may find certain limitations holding you back. Often, your credit score is one of them.
If you lack the finances to make big moves in your life, you will have to rely on loans for them. For example, your credit score may determine if you can:
- Go back to school
- Pay for a child’s college tuition
- Buy a house
- Move to a more desirable neighborhood or town
- Start a business
- Purchase a car
If you have any ambition to do any of these things in your future, a good credit score will make or break your chances of accomplishing these goals.
Currently, the homeownership rate in Canada is around 69%, and if you don’t want to fall behind the majority of the country, you’ll need a good credit score to apply for a mortgage.
Other than opening doors for yourself, saving money is the most significant benefit of a good credit score.
The difference of one hundred points on a credit score could be a difference of over 4% on an interest rate, which translates to enormous savings on larger loans, especially for mortgages.
Now, if you’re thinking that you already have a mortgage, so why care, think again. If you ever want to refinance your mortgage and potentially save thousands of dollars, then continuing to improve your score is crucial.
Not only that but many Canadians have found themselves in financial trouble due to credit card debt, especially considering most interest rates are above 20%. These are often called “debt traps” for those with low income or low credit, as they are far more expensive and lead to greater financial hardship.
Believe it or not, some employers will actually check your credit history before hiring you, especially if the role you apply for involves financial work. If you’re looking for a career change in the future, credit checks are more common than you may think.
Around 72% of employers conduct background checks on employers, and 29% of checks include credit history. Set yourself up for success in your career by improving your credit score today!
Even in the short-term, long before you decide to buy a house, most landlords run credit checks. People have found themselves moving back with their parents or even homeless due to poor credit, even if they have the necessary income to make rent.
What Is Considered a Good Score?
As we mentioned, the average credit score is around 650, but is that “good”?
Depending on the lender, a “good” score starts anywhere between 680 and 740. If you don’t know, the range goes from 300 to 850, with 850 being the best possible score and 300 being the lowest. Don’t worry about getting an 850, as this is almost impossible to achieve.
In most cases, once you are above 700, you shouldn’t have trouble finding loans. However, that doesn’t mean you shouldn’t continue to build your score. As we mentioned, mobility is only one factor.
The difference between a 720 credit score and a 760 could be the difference between a 2.49% interest rate and a 3.99% interest rate, which could be $6,000 in the context of a $200,000 home. You wouldn’t spend an extra $6,000 on a car, regardless of how long the loan term is, so don’t overspend on a house either.
Generally, and this varies, the 750 to 770+ range is considered excellent, 680 or higher is good, and 600 is fair. Any score below that will require improvement, especially before seeking larger loans like a mortgage.
How to Improve Your Score
Now that you understand why a good credit score is so important in today’s world, you probably want to know how to improve yours. Most importantly, you want to avoid making the same common credit repair mistakes, which can dig you deeper into a hole.
Other than that, here are some steps to help you build credit in 2022!
Know the Factors
While new credit (primarily measured by hard inquiries) is a factor in your credit score, don’t worry too much about it. It only affects 10% of your score at most, and unless you’re applying for dozens of loans at a time, the difference will only be a few points.
In most cases, the slight decline in your score from a new hard inquiry will be removed from your history within a couple of months or, at most, two years.
Instead, focus on the most important aspects of your score, which are payment history (35% of your score), credit utilization (30%), length of credit history (15%), and credit mix (10%).
Payment history is the most important aspect. Even if you have to make a minimum payment, always pay on time every month. This alone will ensure you have a fair credit score.
Credit utilization is determined by your revolving lines of credit like credit cards. Staying under 20% will avoid any negative impact on your score, but staying under 10% (or even 1%) will help boost your score. That doesn’t mean you can’t spend more than 10%, just don’t leave a higher balance at the end of your payment schedule.
Next is your age of credit. Unfortunately, you can only improve this with time, so keep your credit lines open and in good standing for as long as possible.
Finally, your credit mix is simply the mix of installment loans (mortgages, car payments, etc.) and revolving lines of credit (credit cards, HELOCs, etc.). Having a healthy mix in good standing will help boost your score, but it isn’t as much of a priority as the first three on this list.
Know Where You Stand
You can look at your credit score, but it will count as an inquiry, which will lower your score by a small amount. Doing this one time isn’t a big deal, especially if you aren’t planning to apply for any lines of credit within the next couple of months.
If you’re wary about checking your official score, there are helpful apps that pull information from your loans and give you a helpful estimate. Checking these regularly won’t affect your score, but they won’t be entirely accurate.
Make a Plan
Based on your credit report, see where your weaknesses are and try to improve upon them. This may mean applying for a new credit card, spending less on your current ones, making larger payments, or anything else.
This is entirely dependent on your personal financial situation, but once you know where your score stands, it will be easier to develop a strategy.
If you have high credit card debt, you may want to take out a personal installment loan, as this will help improve your credit mix and save you a fortune on interest. Most credit cards have 20% to 25% APR, meaning that a balance of $10,000 will add up to over $2,500 in interest in only a year by making the minimum payments.
Instead, use a loan and pay it down over time. This will improve your credit mix, credit utilization, and payment history if you do it right. It’s a win-win-win!
Regardless of your financial situation, your credit score is set up entirely to measure your consistency with payments, credit utilization, and more. Lenders want to see consistency to assure that you are a safe borrower.
Develop a system that works for you, never miss a payment, and start building your score. You’ll be glad you did when you decide to start making big moves in your life!
Build Your Score Today
Now that we’ve answered the question “why is your credit score important?” and offered some tips to build credit, there’s no time like the present to get started. The sooner you do, the sooner you can enjoy the benefits of a positive credit score.
Stay up to date with our latest financial advice and feel free to contact us with any questions or for any financial help you need!