To help you navigate post-CERB Canada, here is everything you need to know about what government help is available to you in 2022.
Your credit score is a vital part of your financial health and will determine the likelihood of you being able to get approved for various loans, including mortgages, car loans, and personal loans, among others. But your credit score can plummet rather quickly if you aren’t careful with your finances.
Want to know what the minimum credit score is for mortgage approval? Click here.
What is a Credit Score?
In Canada, credit scores can be anywhere from 300 (for those who are just starting to build credit) to 900 points, which is considered the highest and most ideal score. In order to get approved for various types of loans, a credit score of 650 is typically required. Any less than this will make it much harder to obtain a conventional loan. Lower credit scores also typically mean a higher interest rate will be charged, which translates into a more expensive loan and more money spent.
For more information about your Canadian credit score, read this.
The biggest factor that can impact a credit score – both positively or negatively – is your payment history. If you are diligent about making all of your debt payments on time and in full, your credit score will benefit and you should enjoy a healthy credit rating. On the other hand, if you consistently miss payments or pay them late, your credit score will surely suffer. Even missing just one payment can put a ding on your credit rating.
Certain blemishes can stay on your credit report for as long as 7 years and sometimes even longer. Paying your bills on time every month is the most important way to keep your credit score high, or improve it if it’s low.
Look here to learn more about how long information stays on your credit report.
How Quickly Can Your Credit Score Drop?
There is constantly a flow of information being sent to the credit reporting agencies about consumer credit. Every time these bureaus receive information about your credit, your score will ultimately change, even if by the slightest amount.
How fast your credit score can drop depends on a few things, including the number of accounts in your credit file. The more accounts you have, the more times it can change and by a higher amount. For instance, if you have 7 accounts in your credit file, your score can realistically change 7 times per month if your score is pulled every time an account is reported.
That said, even though there may be a lot of changes in information being reported, that doesn’t necessarily mean that there will be a major difference in your credit score. But while some factors might make a minor difference, others can significantly change your score.
Things that can cause your score to drop quickly include:
In cases like these, you can expect double-digit drops in your credit score in as little as a month.
Click here to learn how to rebuild your credit after bankruptcy.
Why Did My Credit Score Drop After Paying Off Debt?
You might notice that your credit score takes a hit even after paying off your debt. Why is this?
The truth is, getting a perfect credit score isn’t an easy feat, as there are dozens of variables that are factored into a credit score calculation. For starters, paying off your debt doesn’t necessarily translate into a higher score. Your score won’t go down just because you paid off your loans, but your payment history can have an effect.
What really matters is whether you’re making your payments on time, every time. Even if you managed to pay off your debt, your score will take a hit if you missed a few payments along the way. Paying down debt is great, but you won’t necessarily be rewarded for it. It’s your payment history that truly matters to your score.
Check out this infographic for more information about how your credit score is calculated.
Paying Off Credit Cards in Full – How it Affects Your Credit Score
Credit cards are notorious for charging sky-high interest rates, which makes them tough to pay down. But if you managed to pay off your credit card balance, that’s a big accomplishment that will both save you money in interest and have a positive effect on your credit score.
Paying credit cards off can be good for your credit score because a big portion of it is based on amounts owed and the most significant factor is your credit utilization ratio.
This magic number represents how much of your credit limit you are using. For instance, if your credit limit on your credit card is $10,000 and your balance is $5,000, your credit utilization ratio is 50%. As your balance is paid down, your credit utilization ratio will inevitably improve, as will your credit score.
Want to know what happens if you only make your minimum monthly payments? Learn about the minimum payment trap.
Sudden Drop in Credit Score? Here Are the Potential Causes
In addition to the number of late or missed payments made, other factors can affect your score as well, including the following:
- Number of inquiries – If potential lenders inquire about your credit score too many times, this can negatively affect your score.
- Average age of accounts – Newer accounts typically pull down your score while “old credit” can actually be good for it.
- Number of open installment loans – Installment loans can help or hurt your credit score, depending on the situation. If you open too many accounts in a short period of time, your credit score may suffer.
- Average credit card limit – Your credit score can drop if you consistently max out your credit card limit. It’s generally best to limit your credit card spending to no more than 30% of your limit.
To prevent any mishaps on your credit, be sure to take the following measures:
- Make your payments in full and on time
- Don’t spend more than 30% of your credit card limit
- Don’t open up too many accounts
- Don’t take out too many loans
- Use cash whenever possible
Your credit score matters a great deal when it comes to taking out loans. It can go down rather quickly if you make financial blunders along the way and can take a while to repair. Your best bet is to make sure it stays within a healthy range from the get-go. But if you’ve made some mistakes in the past and are now in need of improving your credit score, there are steps you can take to improve it. Speak with a financial advisor to help guide you in the right direction to improve your credit score.
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