If you have a good score, you can save a great deal of money over your lifetime through better interest rates and promotions offered by credit lenders. These lenders -- such as credit card companies and banks -- rely on credit scores to help them determine whether to approve your credit application, as well as what rates you qualify for.
Your credit score is a number between 300 and 900, and is constantly changing as new information is calculated and old or inaccurate information is discarded. Something as small as a fluctuating credit card balance, or a late payment on a phone bill, can lower your score.
The five main factors that affect your credit score are:
• Amount owed. Maxing out your credit cards will negatively affect your credit score. Your score is partially calculated on how much debt you are carrying, compared to how much credit you have available to you.
• Payment history. This is calculated based on whether you pay your bills on time, how long it’s been since you’ve made your last payment, how long it took you to make your late payment, and how many different accounts you are late on. The more times you are late, the more it will affect your score.
• Length of credit history. This is based on the age of your oldest account, as well as the average age of all of your accounts combined.
• Types of credit used. Typically, a combination of revolving debts and installment loans will give you the best chance for a higher score.
• New credit. Applying for credit often will have a negative impact on your score -- especially if you do not have a long credit history. Be aware of how often you are applying for credit cards, bank loans or any other financial products.
The two credit bureaus in Canada are Equifax and TransUnion. They are separate companies, so the financial information they collect about you might be different. Since your credit score won’t be the same with each bureau, and because you won’t have any idea which bureau a lender will use, it’s a good idea to know what both of your scores are.
Be aware that you will not be able to obtain your credit score for free -- you will almost always have to pay for it online. Check out the Equifax and TransUnion websites for more information.
Whether you like it or not, your credit score will affect any aspect of your life that requires a judgment of your credit worthiness. Not knowing what your score is might significantly harm your ability to obtain any sort of credit or loan such as a mortgage renewal or line of credit application, a car loan or even simply trying to rent an apartment.
Knowing where you stand among your peers and taking the right steps toward improving your credit score is very important to your future and your financial well-being.
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