In an era where credit payments are being used more than ever, the term “credit score” seems to be the definition of an individual’s financial competence. However, for most people, it can be a mystery trying to decipher what exactly their credit score means and how it affects them. As a preview to our upcoming “The Truth About Credit” workshop, we’d like to look at what your credit score really means for you.
What Makes Up Your Credit Score
Before analyzing your score, it’s important that you know what goes into a credit score and what doesn’t. In most cases, there are five things that go into determining your credit score: your payment history, amounts owed, length of credit history, credit mix, and new credit. Making sure you make your payments on time, keeping a low amounts owed, and ensuring that you can maintain credit for a long period of time are all ways to keep up a good credit score. The exact weight of each facet will be covered more in the “Truth About Credit” workshop, but this gives you a better understanding of what exactly goes into your credit score! However, there are some things that may or may not affect your score. For example, your income, net worth, debit card, and paying rent and other bills may not affect your credit score, but not paying these bills can negatively impact your score.
How does it affect you?
Your credit score is used whenever you are looking to get some form of credit. This can be applying for a mortgage, increasing the limit on your credit card, or taking out a business loan. Lending institutions will use your credit score to determine your financial health and how likely you are to pay them back. In some cases, landlords can search up your credit score as well. As a business owner, your credit score will be looked at by a number of people.
It’s important that you are able to maintain your debts and do not let them overpower you. While your credit score does not speak to who you are as an individual, it is one of the only quantitative measures lenders have to help them in making their decisions.
What do I do if I have a bad credit score?
Even though it may seem like you’re doomed if you have a bad credit score, don’t worry! Everyone goes through tougher times in their lives where they may have to borrow more than they can pay off, but there are ways to improve your credit. Here are some tips to getting your credit score back on track:
1. Reduce your credit utilization: Keeping too high of a “credit used” to “credit available” ratio can harm your credit, particularly if you aren’t making your payments in full. A good balance might be to stay within 30% of your available credit more often. When paying your bills, try to make more than the minimum payment each month and ideally try to make full payments when possible.
2. Pay your bills on time: Since payment history is a factor in your credit score, it’s important that you are able to make bill payments on time. If you find yourself forgetting to make them, set up automatic payments and prepare for them in advance. This will help you stay organized and you won’t suffer from interest and missed payment fees.
3. Get a secured credit card account: This is similar to a pre-paid phone plan. You deposit a certain amount of money initially but then you can use the card like a regular credit card. This is a simple solution if you either have no or poor credit history.
There are plenty more ways to improve your credit score and learn more about what it means for you. For the full “Truth About Credit”, make sure to attend our workshop on August 27th in Calgary and September 12th in Edmonton!