Let’s talk about credit. It really doesn’t have to be scary or confusing!
Understand your credit score
A credit score is a three-digit number based on the information in your credit report. Credit bureaus don’t release the exact math behind this number, but what we do know is that your credit score increases when you can demonstrate that you use credit responsibly (paying bills on time) and that your credit score decreases when you show that you have difficulty managing credit (a bill is paid late or goes to collections).
Your credit score, also known as a FICO score, is used to tell a lender the likelihood that you’ll be able to pay back the money they’re lending.
It’s up to each lender to decide the lowest credit score they feel comfortable with and will likely use this score to set an interest rate and a credit limit. The higher the score, the lower the interest rate, because, generally speaking, the risk for the lender is lower.
In Canada, credit scores range from 300 to 900, with the best being 900. Credit scores change every time your credit report is updated.
Anatomy of a Credit Score
As we’ve mentioned, the exact math equation that creates a credit score is unknown, but we do know that it is based on the information in your credit report, which is then compared to millions of other people’s information.
| The Fico Ranges: | |
|---|---|
| 760-900 | Best |
| 700-759 | |
| 660-699 | |
| 620-659 | |
| 580-619 | |
| 300-579 | Worst |
The median FICO score is 720 out of a possible 900. The riskiest customers have scores below 600. Higher scores are better and translate to lower interest rates.
Ways to improve your credit score:
Consolidating debt, like using your line of credit to pay off credit cards is one way to improve your credit score if you have debt in multiple areas. Another way to improve your score is by building up your responsible use of credit. In fact, 78% of borrowers see their FICO score increase 3 months after getting a loan. On average, this increase is 23 points!
