What Does My Credit Score Say About Me?
In modern society, many fundamental aspects of our lifestyles are dependent on an individual’s credit score.
Whether you’re looking for a new home, opening up a bank account, a bad credit car loan in Toronto, deciding on an insurance plan, or are in desperate need of a new credit card, your credit score will be reviewed. As a result, there’s no doubt that credit scores and maintaining them are important to have access to essential services, goods, and property.
Your credit score does say a lot about you–but whether it’s an accurate reflection of your financial situation is a completely different story. We’ve outlined how to break down your credit score, and how you can consistently work to improve it!
Credit Score Breakdown
Before we dive into the nitty gritty of credit scores, it’s important to understand the difference between credit reports and credit scores.
Credit reports are relatively simple in that its only purpose is to track your history of paying debts and bills. It’s a good tool to see your financial reliability on a surface level. Constrastingly, there are a number of variables involved in your three digit credit score equation, each with their own weight:
1. Payment History (35%)
2. Amount owed (30%)
3. Length of History (15%)
4. New Credit (10%)
5. Types of Credit Used (10%)
The numbers above reflect an approximation of credit score breakdowns, but some adjust the value of some criteria. For example, TransUnion places 40% of your credit score on payment history, whereas Equifax uses 30%. Once credit bureaus input your data into their equation, your credit score is then placed on a spectrum that has five levels. The five levels are:
Very Good: 725-759
As one may predict, everyone should strive to manage their finances in a manner that will land them in the “excellent” range. The system is set up to reward those with higher credit scores, and disadvantage those with low credit scores (anywhere in the fair range and below).
Your credit score matters not only in terms of being approved for loans and new forms of credit, but also how much interest you’ll be paying on loans. With a credit score in the excellent range, you’re guaranteed to pay lower rates than someone in the good range. In the case of big-ticket items like cars and properties, Interest can make a huge dent on your bank account. For example, those with “excellent” credit scores could save 1-2% on interest whereas those in the fair range or below would have to pay 1-2% more.
Having lower interest rates can really pack a punch–over the course of a 3 year car loan in Toronto, it could save hundreds of dollars.
Unfortunately, the system isn’t sympathetic to various life circumstances, which is where the credit score system gets increasingly complicated. For example, if someone missed bills due to suddenly being unemployed, or has to face recurring medical expenses, the system will unjustly disadvantage them at a time where they least need it. The credit system is designed as black or white–either you manage your finances poorly, are irresponsible and unreliable, or you’re financially responsible and trustworthy.
Here at AutoLoans.ca, we understand that life doesn’t work that way, and that a credit score shouldn’t be the sole determining factor of whether you deserve a fair mortgage rate, new credit card, or a bad credit car loan in Toronto. We’ve made it one of our top priorities to put the customer first and work to get you the best deals in town despite what your credit score may be.
Improving Your Credit Score
Every adult should have a firm understanding of how their score has been calculated, reviewed credit reports, and are aware of where they stand within the credit score spectrum. Afterwards, the next steps should be to either maintain your score or work to improve it.
For those that may have a low credit score, there are fortunately a number of strategies that can help boost scores in the long term. However, it’s important to know that there isn’t an easy, quick fix to earning a high credit score– it requires consistent work. We’ve outlined our top five tips to improving your credit score:
1. Make Your Payments On Time
As mentioned earlier, your payment history is used for credit reports and accounts for approximately 35% of your credit score.
Making payments regularly can be difficult if you’re facing any sudden, unforeseen expenses– and if that’s the case, you can try to negotiate with credit lenders to erase debts that were collected as a result of those unexpected circumstances. Sometimes, if you offer to pay your balance (and they agree to your offer) you can change your statements to be reported as “paid as agreed” or better yet, removed entirely. This is often a last resort as it’s not guaranteed, and ultimately paying pills on time is the best way to get an ideal credit score.
We recommend setting up auto pay through online banking so that can avoid scheduling bill payments on your calendar. With autopay, funds will automatically be deducted from your account and into its respective bill.
2. Use More Of Your Available Credit
If you’ve ever noticed that people rarely pay with cash and instead use credit cards, there is a reason why.
On top of the convenience of using a credit card, increasing your card frequency (and of course paying it off on time) demonstrates your ability to responsibly use credit. This tactic can build credit over time as your credit history accounts for 15% of your credit score on average. Having excellent finance management on your account is precisely what lenders like to see, and it’s easy to do as long as you’re being careful! We recommend using your credit card like a debit card or cash– only spend what you can. Rather than spending $3 cash on your morning coffee, just put it on your card instead.
On top of using your card more often, it can actually help you visualize where your money is going and lead to better budgeting. Spending more on your credit card as opposed to other payment methods can ultimately not only increase your credit score, but help you save in the long-term!
3. Keep Your Credit Card Balance Low
When it comes to credit card usage, there is a general rule of thumb to always keep your credit card balances low. Financial advisors typically recommend keeping your credit card balance to 25-30% of your limit, if possible. For example, with a limit of $2,000, it’s ideal to keep your balance to $500-$600.
High card balances give lenders the impression that you may not be too responsible with money. Let’s say you have a $1,000 credit limit and are spending $1,999 monthly, it doesn’t reflect a healthy credit spent to credit available ratio. It’s important to maintain a good ratio as credit bureaus closely observe your spending habits. An individual’s used credit vs. available credit ratio accounts for (on average) 30% of your overall credit score.
4. Develop A Healthy Credit Mix
Have you ever been to a grocery store and seen several options for one type of product? In a way, that’s kind of what we mean by a “healthy credit mix”.
Credit bureaus that are analyzing finances like to see that you’re responsible across a small number of accounts with different platforms. Lenders also like to see borrowing sets made up of different mixes of credit. Combining a credit card with a bad credit car loan in Toronto, a home loan, and credit accounts (paid consistently) can appear to make your credit health look well rounded and financially sound.
Whether you’re a recent immigrant to Canada, or are a student with one credit card and are looking to add to your credit mix, we highly recommend doing so with careful consideration. However, we don’t suggest applying to any and every credit card– first, because it’s unnecessary labour on your part, and second, lenders perform “hard checks”. Hard checks or inquiries on an individual’s credit health are performed by lenders for every new credit card, refinance request, or loan.
Additionally, multiple hard inquiries can actually negatively impact your credit score! Some lenders may see you as a red flag if you have too many hard checks within a short period. Therefore, research lenders before applying to them and try to spread applications if possible.
5. Maintain Your Old Credit Cards
Everyone has got that old credit card from high school that they use once in a blue moon. If you’re thinking about cancelling that card, we recommend not doing so just yet.
In our breakdown of how credit scores are calculated, we mentioned that credit history accounts for 15% of your score (on average). As a result, cancelling your older cards can eliminate some of your previous credit history and your credit score may consequently take a hit. This tip is potentially the easiest of them all, but it’s important to stay on top of all forms of credit. Everything is interrelated: credit history, paying bills on time, creating credit mixes, keeping card balances low, and using your available credit.
To make the best of your finances while building credit, you must develop a strategic balancing act amongst all of your credit venues. If you keep a regular schedule it may not seem as daunting of a task, and you’ll be able to build your score back up in no time!
The way that the credit system is currently outlined, it does unfortunately say a lot about you to credit bureaus and lenders. Unfortunately, depending on your score, you can either be seen as a liability, or as financially stable and trustworthy person. Furthermore, the system disadvantages the disadvantaged while they’re already down, and rewards those that are simply maintaining good credit or haven’t experienced major hits on their finances.
At AutoLoans.ca, we make our customers the priority and will accept all bad credit car loan applications in Toronto. Beyond that, we accept no credit or down payment loans as well because we firmly believe that everyone should have access to fundamental resources like car loans. Members of our team work step by step with individuals to understand their personal and financial needs.
Afterwards, we’ll work tirelessly to get you the best interest rates in town– we also believe that everyone has the right to pay the lowest amount possible. Financing your car doesn’t have to be a pain when you’re working with the right credit providers!
Contact us today to get the process started, and rebuild credit while you’re at it.