We break down what your credit score is all about so that you can build yours up before it’s too late.
Whatfore art thou credit score?
Good question. Short answer: A credit score is an assessment of a consumer’s
creditworthiness. Long, and more entertaining answer: read this
Credit where credit is due.
Before we continue, disclaimer: the word credit is going to appear a lot in this article. Like, a
lot a lot. Nature of the beast. Extra credit goes to those who count the credit occurrences.
They came to this heart-stopping 3-digit number, how, exactly?
Those 3 little numbers between 300 and 900 mean oh so much, so it helps to
understand how they came to be yours. There are five factors which affect your credit
score, with each one contributing a different weighting to the overall calculation:
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REW’s 5 Top Tips to improve your credit score.
1. Pay them bills.
Your payment history (35%)
The largest portion of your credit score is attributed to your payment history, making up 35%
of your overall score. Do you pay your bills on time? How many late, partial or missed
payments can they spot in your past? Essentially, are you good with your money and your
financial obligations? These historical trends are the number one indicator to creditors that
you may be a credit risk.
Tip: Paying your bills on time is the best way to improve your credit score. No buts.
Just do it.
2. Don’t max out.
Your credit utilization (30%)
30% of the calculation takes your credit utilization into account. In other words, how many credit streams do you access and how much do you owe, compared to what is available to you. The higher these numbers, the lower your credit score will be, because as with your payment history, lenders want to see responsible use of credit. For each trade line (such as a credit card), the goal is to have the balance under 70% of the total allowable credit limit. So
don’t max out your credit cards, and don’t have more credit cards than you need.
Tip: Keep your credit card balances as healthy as a recently-single crossfit soccer
dad.
3. Your past says a lot.
Your credit history (15%)
Your credit history is another indicator of how you manage your finances. What lenders are
looking for is the age of your trade lines, such as credit cards. The longer your file (how
many years you have been an active user of credit), the more reliable their prediction of your
risk profile will be.
Although it accounts for a smaller portion of your credit score (15%), it is an easy way for the
credit bureau to spot whether you are a trustworthy spender or not. So don’t cancel your
credit cards in a flurry of fear. You need active loan products to build a good credit score and
allow lenders to see how you’ve maintained this credit over the years.
Tip: Good spending choices over a long period of time equals the proverbial match
made in heaven.
4. Diversity never loses.
Your credit diversity (10%)
Contrary to what you may expect, when it comes to your credit profile, less is not necessarily
more. It is helpful to have several different types of credit lines, for example credit cards,
personal loans, and open accounts like monthly mobile phone contracts. If these are well
maintained they can show that you are able to manage various types of credit, with a credit
mix that consists of short-, medium- and long-term options.
Tip: Good credit is like a date night mix-tape, a little bit of everything R&B goes a long
way.
5. Don’t get stuck between the credit bureau and a hard place.
Your number of credit inquiries (10%)
The final consideration, which constitutes 10%, has to do with hard inquiries. Probably not
something you knew existed. A hard inquiry is when a bank or other lender checks your
credit report, and this usually happens when you apply for new credit.
If your report is riddled with enquiries in a short-ish time-frame, lenders will be suspicious as
to why you are trying to access so much credit at once. But, no matter what urban legend
gets told in the playground, ordering your own report will not hurt your credit; this is
classified as a soft inquiry and there are no negative consequences.
Monitoring your score is a good thing. It allows you to flag errors and keep a beady eye out
for fraudulent activity. Then, when it comes time to apply for a mortgage, it is wise to work
with a mortgage broker. REW Money does a singular hard enquiry and send
it to 100s of lenders on your behalf, instead of you approaching multiple banks and racking
up multiple enquiries.
Tip: Don’t apply to a bunch of lenders in succession for different credit lines. Looks
suspicious, is suspicious.
victory
Learn to love your credit score.
With your credit score demystified, you can run an online calculator and have a look-see at your numbers. Good news: you can do it for free! There are a host of free online credit score calculators out there, such as CreditVerify and CreditCanada.
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