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Credit score 101: Effective habits for maintaining a healthy score

A key component of your financial well-being is your credit score. This three-digit number can have a significant impact on the range of loan options you qualify for, the cost of your insurance premiums and even your eligibility for some job opportunities. But despite its importance, a recent survey conducted by Chartered Professional Accountants of Canada revealed that almost a third of respondents did not know what their credit score was.

To help you understand the role that your credit score plays in your financial life, we look at how it is defined and examine some of the factors that can be used to determine your score, as well as outline several effective habits that can help you maintain the health of your credit score.

What is a credit score?

The Financial Consumer Agency of Canada (FCAC) defines your credit score as a number on a credit report from one of Canada’s two credit bureaus – Equifax and TransUnion – that shows “how well you manage credit and how risky it would be for a lender to lend you money.”

While the two credit bureaus don’t share the exact formula for determining your credit score, FCAC says some factors that can affect your score include how long you’ve had credit, your payment history, how much of your credit limit you have used, the types of credit you are using, the number of inquiries on your credit file and whether you have any record of insolvency or bankruptcy.

According to Equifax, credit scores generally range between 300 and 900 and fall under the following categories:

Below, we look at some effective habits you can pick up to maintain a healthy score.

1. Monitor your credit reports.

The first step to maintaining a good credit score is to monitor your credit reports for any errors or signs of fraud. You can request a free copy of your credit report from each of the credit bureaus once a year, and you can also sign up for their credit monitoring services for a fee.

2. Minimize the number of hard inquiries you make.

When you apply for a new loan or credit card, lenders usually initiate a credit check with the credit bureaus, known as a hard inquiry. Hard inquiries can also happen when you sign up for a new phone line or apply for certain jobs. Making several inquiries can have a negative impact on your credit score, so it’s a good idea to limit the number of applications during a given period.

3. Pay your bills on time.

Your payment history has a big impact on your credit score, so making sure that you meet your payment obligations and are never late with your payments is an important habit to support a good score.

4. Diversify your credit.

According to Equifax, having a good mix of credit types – credit cards, car loans, etc. – can suggest to lenders that you “understand the fundamentals of credit.” With this in mind, think about strategically diversifying your credit lines – but remember to space out your applications to avoid making multiple hard inquiries on your credit file at the same time.

5. Look after how much of your credit limit you utilize.

The percentage of available credit you are using, known as your credit utilization ratio, can have a significant effect on your credit score, so try to keep this ratio as low as possible – with both Equifax and TransUnion saying it’s a good idea to keep it below 30%.

What if my credit score has been bruised?

Sometimes, personal circumstances beyond your control, such as a prolonged illness or job loss, can force you to miss payments or spend near or at your credit limit, which will subsequently bruise your credit score. In this unfortunate scenario, how do you go about mending past credit issues when you will likely no longer qualify for credit?

One effective way to rebuild your credit score is by applying for and using a secured credit card, such as the Home Trust Secured Visa. As the name implies, a secured credit card is backed by collateral – typically in the form of a cash deposit. This makes it easier for you to be approved because your credit limit is equal to the amount of security you provide. Your account’s monthly status is also reported to both credit bureaus in Canada, which is a key factor in rebuilding your credit history.

Taking the time to understand your credit score is the first step toward a balanced financial life. Subscribe to our blog for more financial tips and resources straight from one of Canada’s leading mortgage companies.

The information, materials and opinions contained in this Blog are provided for our information only. This Blog does not constitute legal, financial or other professional advice and you should not rely on it as an alternative to specific advice based on your particular circumstance. This Blog contains links to third party websites. These links are provided for information and convenience; Home Trust does not endorse the content of any third party website, and it makes no representation or warranty as to the information on such third party sites. By clicking on any link to a third party site, you leave Home Trust’s website and do so at your own risk. Home Trust disclaims all liability for any damage or loss that results from your access to or reliance on information contained in this Blog or any third party site.


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