It’s been a few months since I last put out a set of videos around credit scores. In that time, I’ve seen a number of articles on renter’s applications being denied because of low credit scores and have heard of this happening to people I personally know. It’s unfortunate that a single number can impact your housing and even job prospects, but that’s the reality we’re living in. And with over 71% of the Canadian population having a very good or excellent credit score, past mistakes could keep you at the bottom of the totem pole.
I was extremely fortunate to graduate university with no debt. While I was in a fantastic financial situation, my credit score wasn’t. There were two reasons for my non-fantastic score.
I only ever had a single credit card and cell phone plan on my credit report, so there wasn’t a whole lot for credit agencies to rate me on.
I made a key mistake. I only had the one credit card, and it didn’t have a high limit. I thought that since I was never maxing it out, and paying it off monthly, it was fine. But was I wrong. According to FCAC, you should limit your credit utilization to 35% of your total available credit. My utilization went up to 95% at times. I was a risky prospect to lenders, because if they offered me $50,000 in credit, would I rack that up to $48,000 and be able to pay it off?
After doing some research, I found an additional credit card to supplement my current card. This not only suited my needs better, it also reduced my utilization since I had a higher limit with two cards (both without an annual fee). Now you might not want to or be able to increase your credit limit, and that’s fine. You can still ensure your utilization is lower than 35% by 1. Using debit for some or most of your purchases, or 2. Pay off your card more frequently than once per month to keep your running balance low.
Credit cards and lines of credit are popular types of debt. These are great for showing good payment history, keeping your utilization low, and keeping a long track record on your report. But the problem with just having these types of debts is that you can rack up your balance at any time. Debt where you pay down a specific amount every month, like a mortgage or car loan can improve your score. You’re probably thinking… I thought this video was supposed to be about a car accident! And it is. I was in a car accident just over a year ago. My poor Forcus (Ford Focus) was completely totalled. Through my insurance, I received a cheque that covered the cost of replacing my car. Even though I had the cash available, I got a car loan for a portion of the cost and invested the cheque in a high interest account that paid 3%. This added a different type of credit to my report (rather than just credit cards which are considered revolving loans), and helped improve my score. Even though the interest rate I paid is slightly higher than what I’m earning in a high interest savings account, the interest paid over the term of the loan can easily make up for itself by improving my credit score and potentially saving me thousands of dollars in interest on a mortgage.
The irony of credit scores is that you need to owe people money for them to exist. Unfortunately those who are in the best financial situation might not have great scores, because they have little credit. This is fine for those who won’t need to apply for a mortgage or show their credit score to a potential landlord to be approved on a lease, but millennials often need a good score to reach their goals. Now I’m not saying that you should go out and get a bunch of new credit cards and car loans and lines of credit to boost your credit score. While you need some credit to show a history, make sure you’re being smart and not over-extending yourself to increase your score now, but put you in a bad financial situation down the road. Your credit score is calculated differently by each financial institution, so “gaming the system” to boost your score based on one credit agency might not necessarily mean that you’ll have a perfect score elsewhere. Be smart with your credit, don’t borrow too close to your total limit at any time, and pay your bills in full and on time, and over time, your score will improve.
For more tips on how you can improve your score based on your situation, check out my previous videos:
For more information on your credit report and score, follow these links:
