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Understanding your credit score

Many things can make or break your score

By Peter Boys CAFA The Financial Coach

Anyone who has ever borrowed money for any type of credit card or personal loan has a credit score. While a high credit score pays off in parks, a low one gives financial institutions reason to not trust you. Without a good score, you may be required to pay higher interest rates or put down a security deposit. If your score is bad enough, you may not even qualify for the loan you need.

Of all the various mistakes you can make that can hurt your credit score, one stands out the most… late payments. Missing a deadline may seem harmless enough, but it has a surprisingly significant impact.

Payment history or whether you’ve made your payments on time matters most when your score is calculated. And it’s not just credit card payments you have to worry about. Your rent, utilities and other bills can make or break your score, too.

How the score breaks down: Your score is calculated based on payment history, how much you owe, your length of credit history, the types of credit you have and how often you apply for new credit.

Income doesn’t affect your score, and neither does your spouse’s financial behaviour until you open a shared account. Even revolving debt won’t hurt you. These are all common misconceptions that people have on how one’s credit scores are calculated.

Carrying credit card balances from month to month and incurring late payment interest fees absolutely does not help your score. Generally, the less you use of your available credit, the better. As a rule, you should try to keep your utilization ratio below 30 percent of your approved credit limit. Carrying high account balances is the second most common issue that negatively affects your score.

What is a good score? Credit scores range from 300 (just getting started) up to 900 points. This is the best possible score. 650 is the magic middle number – a score above 650 will likely qualify you for a standard loan while a score under 650 will likely bring difficulty in receiving new credit.

You can ask for a free copy of your credit file by mail. There are two national credit bureaus in Canada: Equifax Canada and TransUnion Canada. You should check with both bureaus. Complete details on how to order credit reports are available online. The “free-report-by-mail” links are not easy to navigate to, because you can get instant access to your report for a fee.

I recommend checking your credit report at least once a year. This will not damage your score. Thinking that monitoring your credit score hurts it; is another common misconception. You can’t do anything about your credit report until you know what’s in it, then if there’s something you need to address, you can take action. If you find entries in your report that don’t relate to you, you may be a victim of identity theft. You should notify the credit reporting company immediately.

Remember that you, if you’re like most consumers, will find that raising your score can just simply be a matter of consistently paying your bills on time and keeping your balances low. Everything else that impacts your personal credit score - builds on top of these two factors.