What makes a credit score good?
First let’s look at the most common ways a credit score affects your everyday life so that you can better understand why having a good credit score and good credit history is so important.
How can a low credit score affect my daily life?
Your credit score is used to evaluate your credit behaviour by countless people including potential employers, your landlord, banks, lenders and insurance companies. They use your credit score to decide whether or not you can be trusted with more or new credit.
Applying for a job
Having bad credit could prevent you from getting a job. A potential employer can ask your authorization to check your credit score and history. They might see a bad credit score as a sign of irresponsibility and therefore might choose to not hire you.
Applying for a loan
Your credit score plays a big role when a bank or loan agency is deciding whether or not they want to approve you for more credit. Not only will your credit score affect whether you get the new credit it will affect how much credit you get and the interest rates of the new credit. If you are considered a credit risk because your credit score is low then you will potentially be offered a lower credit limit with a higher interest rate.
Renting a vehicle
Although renting a car is not the same as applying for new credit when you sign their application papers you are allowing them to check your credit information. The reason they check this is because they need to know what kind of risk they are taking before they loan you their property. If you have a low credit score you might be seen as a high risk and will not be lent a car.
A potential landlord will also need to check your credit history as they need to assess whether you are a credit risk. A bad credit score may show them that you can’t be trusted to pay your rent on time and therefore they might rent to someone who is less of a risk.
Understanding your credit score
In Canada the range of a credit score is 300, which is the score you have when you first start to build one, to 900, which is the highest you can have. TransUnion a Canadian company that provides credit information to individuals and companies explains that 650 is the point in which you start to have a ‘good’ credit score. What this means it that a credit score over 650 can allow you to qualify for a loan without any trouble, but a credit score under 650 will make it more difficult for you to qualifying for a new loan.
Having a credit card is a great way to establish a credit score, but you must be responsible with it because while it is a good tool to help build your credit score it can also greatly decrease your credit score.
Your credit score represents a single moment in time and can change based on your credit behaviour. Everyone makes mistakes and misuse of loans and credits cards are very common, it will be hard work but everyone can increase their credit score and the most efficient way to do so is to make consistent on time payments. Late or missed payments or several maxed out credit cards will lower your score so always make your payments on time.
Don’t focus on the number too much as your exact credit score will be slightly different based on who is looking at it. The number that you will see once you have ordered your report is based on a different set of calculations for consumers. Furthermore each creditor has its own set of rules and calculations that it applies to your credit to find your score. But don’t worry your score will still be in the same range.
Finally the actual number of your credit score is only one of the many things creditors look at when determining your credit risk and worthiness.
While generally speaking a credit score of 650 is ‘good’ and can qualify you for new credit or a standard loan there is more to a credit report than your credit score. You could potentially have a credit score significantly higher than 650 and still be turned down for a mortgage or whatever new credit you are applying for. The main factor that lenders and banks are looking for when they decide whether or not you’re a credit risk is repayment history.
Lenders want to see that you not only have two or more forms of credit but that you are able to keep up with the payments. Having credit is one thing but using it properly is another, always making payments on time is extremely important. Lenders also want to see at least 1 or 2 years’ worth of good credit behaviour. So if you want to apply for a mortgage within the next couple of years you need to start working on your credit score right away.
For more information on credit scores, check out our learning center.