Think about the last time you applied for a loan or set up a new account, and the salesperson said “we’re just going to do a quick credit check, then we can finish up.” Did your heart race? Did you start sweating, experience a sense of panic and dread while you felt the blood rushing to your face? Because that’s how my body used to react every time I had to set up a new utility account. I had no idea what my credit score was, and I was afraid of the embarrassment of being denied. Not knowing was a source of stress, but at the same time I was afraid to know, because then I would have to face the financial mistakes of my past, and I much preferred running from them.
In the last few years, I’ve gotten better at managing my money, in large part because I was determined to stop living day to day, paycheque to paycheque, and build an actual future for myself and my family. I signed up for Credit Karma and later for Borrowell. to monitor my credit rating and ultimately see that my efforts to pay off my debt were paying off in terms of my score. The scores update weekly and may not be an exact representation of the score your creditor will see on any given day, but it will give you a close estimate to understand your financial position over time.
Credit scores range from 300-900, with each of these services assigning different values to poor, fair, good, very good etc. This system is built on the idea that these things are a good predictor of your financial responsibility, and those with a low score are more likely to miss payments or be delinquent. Even if you can secure financing with a low score, it will likely be at a higher interest rate, to mitigate the risk for the lender, but ultimately costing you more in the long run. Every lender uses different criteria to decide whether or not to approve you and what rate they will offer, but here are a few numbers you can use as benchmarks. Under 600 will likely not be approved by conventional lenders, and any loan would probably be at a higher rate. Somewhere between 680 and 720 is a good place to strive for, and higher than that should get you great rates.
The score is made up of 5 different categories, and to improve your score you will need to improve your financial status in as many of these categories as possible.
35% of your score is determined by payment history. This is the biggest factor, and a good place to start making improvements.
30% is dedicated to your debt. This is where I struggled. Ideally you should keep you debt no higher that 30% of your totally available credit.
15% is how far back your credit goes. I’ve had the same Visa for 17 years, which looks good in the eyes of the bank, even though that card has several times been close to maxed.
10% goes to new inquiries. Every time you consent to a credit check, your score will temporarily go down.
10% is for the diversity of your credit accounts. You may have utilities, credit cards, loans, etc, which helps lenders understand your ability to manage a variety of expenses.
Some of these things will be easier to improve, and some will be impossible in a short period, but knowing which factor more heavily into the calculation will help you understand how to efficiently improve your score.
Melissa’s Tips for Improving your credit score.
- Pay all your bills in full every month.
- If you struggle to pay your bills you may need to make some hard cuts to get there, but this is non-negotiable.
- Put every extra penny towards reducing your debt, starting with high interest loans or credit cards.
- Try to reduce debts to no more than 30% of your total available credit. I call this the Magic Number.
- Do not cancel your credit cards, especially the oldest one, as this will both reduce your total available credit and affect your history.
- Talk to your bank about a credit limit increase – but ONLY when you are sure you won’t use it.
- Do not apply for any new credit, unless you don’t currently have a credit card.
- If you can’t get approved for a traditional card, a secured credit card can be a good choice.
- Be patient, because it may take a while to see a change, but it will come!
Last but never least, I write from my own personal experiences, and am not a financial advisor, and suggest you seek advice from a professional should you need to.