What is a credit score and why does it matter?
A credit score is a number between 300 and 900 that describes a consumer’s creditworthiness. The higher your credit score, the better your credit. Credit scores are used by lenders to determine the probability that a borrower will repay their debts. In other words, credit scores are used to determine how risky it is to loan money to someone.
Your credit history is tracked and scored by two major credit bureaus, Equifax and TransUnion. Lenders often apply their own set of rules and preferences when evaluating your creditworthiness, so you don’t have just one credit score. However, the score you receive from the major credit bureaus is generally a great indicator of your credit health.
Having a great credit score has many advantages. For starters, a higher score means that you’re more likely to qualify for new loans, like a mortgage or a credit card. Not only that, but people with higher credit scores are typically offered lower interest rates on their loans. This can mean big savings when it comes time to buy a car or a house.
So what is a good credit score? Here’s the breakdown:
- 300 to 599: is a poor credit score
- 600 to 649: is a fair credit score
- 650 to 719: is a good credit score
- 720 to 799: is a great credit score
- 800 to 900: is an excellent credit score
According to TransUnion, the ‘magic number’ is 650. If your credit score is below 650, you may struggle to qualify for new loans in Canada.
How to check your credit score for free
In the past, viewing your credit score was a hassle, and it could cost as much as $20 a pop. Thankfully, there are now a variety of FinTech firms that will provide you with a monthly credit score free of charge. This is great news for Canadians, because monitoring your credit score is the first step to improving your credit health.
Not only that, it’s a great way to help protect your identity, as you’ll be notified when a new account is opened under your name.
Are Borrowell and Credit Karma safe?
You will have to provide your Social Insurance Number to sign up for Borrowell or Credit Karma. However, both of these firms use the same level of encryption as your online bank, so rest assured that your personal information is secure.
Should I use Borrowell or Credit Karma?
Personally, I use both Borrowell and Credit Karma. It’s worthwhile looking for discrepancies between them, in case one of the credit bureaus has made a mistake with your file.
If I had to recommend one of them, I’d go with Borrowell. It was the first service to offer free credit scores in Canada, and it has additional functionality that Credit Karma doesn’t offer. For example, it offers personalized financial product recommendations outside of just credit cards.
How is your credit score calculated?
Here are the five biggest factors that determine your credit score, with the approximate weight of each:
- Payment history (35%)
- Whether you pay your bills on time is the biggest factor in determining your credit score
- Serious issues like missing or late payments, foreclosures, liens, and bills going to collections can devastate your credit score
- Level of debt (30%)
- Your total level of debt and how much you owe on your loans compared to the original balance is another important factor
- Another component of this factor is your credit utilization ratio. This is how much debt you carry compared to your credit limit. As a rule of thumb, try to keep your credit utilization ratio below 30%. In other words, if you have a $10,000 credit limit try to keep your monthly balance below $3,000.
- The age of your credit history (15%)
- The average age of your accounts and the age of your oldest account is another important factor used to determine your credit score
- An ‘older’ credit history is desirable because it shows you are more experienced handling credit
- Types of credit (10%)
- Your credit score will improve if you have different types of credit
- The two basic types of credit are installment loans (personal loans, mortgages, car loans, etc.) and revolving credit accounts (credit cards, HELOCs, etc.)
- Number of credit inquiries (10%)
- Whenever you apply for a new loan, lenders make a ‘hard’ inquiry into your credit history, which temporarily lowers your credit score
- Checking your credit score with a service like Borrowell or Credit Karma is considered a ‘soft’ inquiry, and does not damage your credit score