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The Impacts Of A Poor Credit Score, And How To Improve it.

General Melanie Ward 19 Jul

With lending rates at an all time low, and people running to remortgage or refinance during the pandemic, getting a handle on your credit score has never been more critical.

Your credit score is a test you don’t want to fail. A great credit score means you can access cheap money for your home, business or debts. A poor credit rating can seriously affect your ability to finance a house, project, consolidate debt, and affect your payments by hundreds of dollars per month. 

First, what is your credit score? And what is considered a good credit score?

A credit score is a three digit number ranging from 300-900 designed to represent the likelihood you will pay your bills on time. Generally speaking the higher the number, the “better” your score, and the better – lower risk – you are as an investment to a bank or lender. 

Banks and financial institutions look at a variety of different sources to determine your “score”. If you are behind on any debts, your debt to income ratio, and how close you are to your maximums on your cards etc…different institutions focus on different elements.

Credit score ratings are generally as follows:

  • 300-579: Poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very good
  • 800-850: Excellent

Any credit score above 670 is generally considered a good score.

Are credit scores important?

Yes, your credit rating is essential when it comes to mortgages or any kind of loans. Quite simply, the difference between being an “A” rated borrower (with an excellent credit score), and a “C” rated borrower can be the difference between getting a mortgage at 2.49% or one closer to 5%. Amortized over 25 years, that’s the difference of $125 per month on every hundred thousand. Your credit rating can also impact how much you can borrow, or if you can borrow at all.

I use Credit Karma, why is my score different than the one that my bank gave me?

There are loads of free credit rating apps out there these days, as well as some paid ones, but I guarantee your lender isn’t using them. While it’s excellent to be monitoring or even thinking about your credit rating, your lender is going to be using something far more intensive, and/or a custom blend just for their institution.

Any free credit app is normally going to give you a better score than what your bank or lender might give you. After all, the credit app has nothing to lose. The lender does, however, and has this measure in place specifically to protect their investment in you.

What’s the best way to find my credit score?

Well most banks and lenders in Canada use something called the Fico Score 8. Unfortunately you can’t get your own Fico Score 8, your best option is  to rely on your mortgage broker when you are applying for a mortgage.  You don’t want to be going to different lenders to check your score, your mortgage broker only has to pull your credit once and we can use it with any lender for up to 30 days. Why? Because every time your score is “pulled” by a lender, it can make your score go down…This is only one of the many advantages of a mortgage broker.

Does this mean you shouldn’t use any of the free credit score apps? 

Free credit score apps can be a good way to keep on top of your total credit on a month to month basis, and that’s never a bad thing. But instead of focusing on your credit score, my suggestion would be to think about your overall credit health instead.

How can I improve my Credit score / rating?

So you can’t get your exact credit score on your own, if you want to make sure your rating is high the next time you go to get a loan here’s what you need to do:

  1. Stay away from your limits.
    Pay down your cards as much as possible, and keep them there. You don’t need to pay them off each month, it can be better to slowly pay down a balance over time. It’s less important to pay off your card than to leave room. This proves you have the discipline not to use credit you have available to you, and shows restraint.
  2. Accept all offers of credit increases, and then don’t use them.
    Ok, this might sound crazy, but if you accept the increase – but don’t eat into it – it once again shows discipline and restraint. More importantly it balances out your credit vs debt ratio. 
  3. Do not close your older or unused cards.
    See #1. It’s all about your debt vs credit ratio, so showing that you have old cards with loads of room on them is good. It’s better to have cards sitting around with no debt, then to close them. But also see #4.
  4. Spread your debt around.
    If you have a credit card that you don’t use often, but you have other ones that are carrying a debt, spread it around. This is a great way to keep your overall debt away from it’s limits, it also ensures that your lender won’t close your card or line of credit from lack of use.
  5. If you want to close the card to avoid an annual fee, just ask the card issuer to downgrade your card to a free card.
    You will retain your valuable history, but avoid annual fees (and the spectre of forgetting to pay the fee).
  6. Do actually have some credit.
    This is for those magical people who save up and pay for things in cash and resist the urge to get into debt…you still need to. Yes even you. Everyone needs to develop some kind of credit history, because believe it or not having nothing is as bad for you as having a bad score. So even if you don’t need it, get a credit card, and buy things on it occasionally, and pay it off. 
  7. If you can pay off your statements each month, wait until a few days before they are due.
    Honestly it’s just as good for your credit rating to show slow diligence in paying off debt, over time, as long as you are away from your limits. Paying things off totally is nice for those people that can do it, but it’s not necessarily helping your credit limit.