It’s the number that can make the difference between you getting that sweet ride or finally purchasing that dream home. It tells others how well you take care of your money and if you can be trusted when you agree to pay back a loan or bill. In many ways, your relationship with money will dictate the type of life you will lead, which is why it’s critical for you to understand the role your credit score plays in constructing that life.
There are five key things to know when it comes to credit scores and what effect each factor as on your score:
Payment history 35%
Debt (amounts owed) 30%
Age of credit history 15%
New credit inquiries 10%
Mix of credit types 10%
So, what do these numbers mean and what can you do to make sure you are maximizing each factor to its fullest?
Punctuality Is Key
Let’s start with your payment history. This is the most important indicator in your credit file. The amount of debt you have doesn’t matter. What matters is that you have a long history of making your payments ON TIME. Lenders see that as a good sign. Any history of a missed or late payment is going to affect your score, especially ones that have gone to collections. It can take years to get it removed from your record.
Are You Maxed Out?
Using most of the credit available to you gives the impression that you are not able to take on new debt. For example, if you are using $5,000 on a credit card with a limit of $10 000, it doesn’t look as bad as using $5000 on a $6000 limit. Also, if you are paying off multiple credit cards and then cancelling them, you actually could be hurting your score. It gives the impression that you are in over your head.
The longer your history, the more accurate your score can be. You need to have some credit activity to create a score and keep it going. This is important for when you want to make those big purchases. Some small things that you can do to build your credit include applying for credit cards or loans and paying them regularly and paying your cell phone bill, utilities and rent on time. Even buying furniture on a store payment plan can kickstart your credit footprint.
Who’s Checking You Out
There are two different types of inquires – hard and soft. Hard inquiries are the ones made when you apply for credit cards or loans. This affects your score, but the algorithm weighs this data differently depending on your rating. If it is good, companies checking your score won’t have much of an effect. Soft inquiries don’t affect your score at all, so if you want to take a peak a couple of times a week to see how you’re doing, don’t worry, you’re not changing anything.
Mix It Up
You want to have a mix of credit types on your record. From bills to loans, these show your ability to be a financially responsible person – as long as you are paying on time! It is good to show diversity in your portfolio so that it doesn’t appear that you can only manage one credit card and a cell phone bill. If that’s the case, how can you pay a mortgage or car loan?
If your credit is poor, don't despair. It is fixable. Unfortunately, many people get off to a bad start with credit because of bad decisions made during that first taste of financial freedom as young adults. It happens to many of us; it happened to me. But it can be fixed with the right financial plan of action and the right advisor by your side. I did it for myself, and I can do it for you.
Ian Webster's nearly two decades of recognized experience at several well-known financial organizations has given him the inside track on the upsell of products such as mortgages and mutual funds and allowed him to help clients with everything from lowering their taxes to developing profitable investment portfolios. His expertise has been featured in The Globe and Mail, Toronto Star, Toronto Sun, and Time. He has also been a featured financial speaker at many high-profile networking functions.