Updated: Feb 10
Credit score. The name makes it sound like it's a game to play to win, and in a sense it is. It's my favourite kind of game where you are your own competition. An excellent credit score is something that you can win. You can do so by playing by the rules and mastering the game that is credit. But, what are the rules? Like all games, this is something you're going to need to know if you want to win. And that is exactly what we're going to go over today.
What is a credit score?
A credit score is a unique number typically between 300 - 900 that gives insight into an individual's borrowing history. Basically, it shows your ability to pay your bills on time and is used by lenders to determine whether you are responsible and trustworthy enough to lend money to. The higher the number, the better your score.
Your credit score is calculated using what is reported on your credit bureau. In short, your credit bureau is a compilation of all the institutions that you are either borrowing from or owing bills to reporting to Equifax and Transunion whether or not you pay your bills on time and in full.
Why is a healthy credit score important?
Because lenders will look at your credit score and what is reporting on your credit bureau when deciding whether to lend to you, you must show be able to show that you are responsible for managing your expenses and paying your bills on time.
Let's make it personal: if an acquaintance of yours approached you asking to borrow money, and you knew he had been borrowing money from all of your friends and not paying them back; would you lend money to them? I know I wouldn't. This is exactly how a lender thinks. They need to make sure that the risk they take on by lending out money is minimal, and the best way to do this is by looking at someone's lending history. People's past behaviour is a good indicator of their future behaviour. For those who think they would never borrow money because debt is bad and so they don't need to worry about their credit; keep an open mind. I one hundred percent agree that we should avoid unnecessary debt, and am a huge advocator for living within your means. Credit should never be something you use so that you can afford to live outside your budget. However, realistically, most people will take on debt to achieve their goals, like buying their first home. Don't close that door on yourself; establish good credit early on.
How can you build good credit?
So let's get annoying: to borrow money, you need good credit. To have good credit, you need to borrow money! Don't worry, it's not as difficult as it seems. Most financial institutions will have a student credit card with a small limit that you can get with no prior borrowing history. That's exactly how I established my own credit. Typically, you will start with a credit limit of $500 - $2,000. This is a great way to start building credit, but only if you can stay within your budget and not overspend.
The most important thing to keep front and center when getting your first credit card is that the credit card is a tool to establish good credit. Is it not a means to buy things you would otherwise not be able to afford. It is too easy to fall down the rabbit hole of spending and end up drowning in payments you can't make, and then end up with a bad credit score. It's also really important that you pay off your credit card in full, otherwise, you're paying fees you don't need to be paying! Learn more about this here.
What factors affect credit score?
Paying on time
Paying on time is key to building and maintaining good credit. As little as one late payment can bring down your score. Not to mention the fees that can come with late payments!
Paying in full
In addition to paying on time, paying in full will positively affect your score. The reason for this is paying in full shows that you are able to manage your budget and spend within your means. If that's not incentive enough: paying in full will save you money on interest fees. Don't give away your money for free!!
How much of your available credit limit you use
Something that nobody ever tells you is that you shouldn't regularly use the entirety of your available credit limit. Generally speaking, it is recommended that you not surpass 30% of your available credit limit. So, if you have a $10,000 total limit across all your lending products, it is recommended that you stay around that $3,000 mark. Again, this has to do with showing your ability to manage your expenses and budget.
How can you repair bad credit?
Ok, so you've fallen down the rabbit hole. Now what? I know it's stressful, trust me; I've been there. But you can fix this, so stop worrying and start fixing! Step 1
Pay off whatever it is that has dragged your credit score down. Did you forget to pay a bill? Did an item go to collections? Find out why your credit has gone down, and then pay it off. Until this is done, your credit will not go back up. A great way to find this out is by requesting a report of your credit bureau - this can be requested through either Transunion or Equifax. An alternative way to keep track of your score and what is reporting on your bureau is by using a free app called "Credit Karma" - this is a personal favourite of mine, highly recommend!
Once you've settled what was dragging down your score, now is the time to show that you can pay your bills on time. So start paying your bills on time!
Step 3 Maintain good habits! Keep using and paying off your credit in full, and watch your score go up!
And that's it! Pretty simple right? Go score some credit!